With demand for the old pension system (OPS) with guaranteed benefits increasing, the Centre and several state and local governments are looking for strategies to save pension reforms by taking a happy medium between the monetarily expensive OPS and the reform-oriented National Pension System (NPS).
The Alternative Solution:
One alternative route under consideration is to avail guaranteed pensions to public servants at around 50% of their last salaries under the NPS by reworking the existing scheme without overburdening the public finances. Although OPS is centred on the idea of defined benefit plans, NPS is predicated on the notion of defined contribution.
As of now, under the NPS, also referred to as the pension scheme, 60% of the cumulative corpus from contributions made during a person’s years in service can be withdrawn only at the time they retire. Such a pullout is also tax-free. The remaining 40% is committed to investing in annuities, which further, according to estimates, could yield a pension approximate of approximately 30% – 35% of the last pay drawn. Even so, because the returns are market-linked, it is not a secured pension.
Authorities believe that the NPS could be amended so that, upon superannuation, an employee receives her contribution of approximately 41.7% (established from a contribution of 10% of remuneration) as a lump sum payment.
“An evaluation found that if the sum 58.3% corpus assembled from the central/state government contribution (14%) is annualised, the retirement benefits in NPS could be approximately 50% of the previously drawn salary,” a public official stated “. If investment returns are less than the sum assured, the administration responsible could make up the difference by making a contribution a little more to NPS, according to the official.
What is the issue we’re facing?
The single most important issue with this framework is that, unlike OPS, which occasionally revises pension upward to keep up with inflation and monthly payments based on future Pay Commission awards, it would be a difficult task under NPS because the retirement plan corpus would remain constant post-retirement.
Authorities, on the other hand, claim that there are solutions to this problem. Rather than making investments in the pension corpus in low-yielding annuities, the resources could achieve a higher profit (presently, pension schemes generate around 5-6% whereas NPS earnings are close to 10%) by maintaining the corpus in the NPS structure under a scheme to fulfil the aim of scheduled pension revision.
What is the current situation?
The Pension Fund Regulatory and Development Authority (PFRDA) has dismissed Rajasthan, Chhattisgarh, and Jharkhand’s request for possession of the cumulative corpus under the NPS ever since they declared their intention to return to OPS in 2022, claiming that the law does not allow such withdrawals. These states have ceased making new advances to the NPS.
Even states like Punjab, which have officially confirmed a return to OPS, will face challenges due to their shaky finances. West Bengal, while not joining NPS to make employees satisfied, also did not adopt the 7th Pay Commission award to retain remuneration and pension bills in check.
Its employees are still compensated under the Sixth Pay Commission award, with little annual growth in dearness allowance, whereas the majority of states have instated the Seventh Pay Commission award, and their employees are paid more and may be eligible for a relatively high pension under NPS as well, according to experts.
