National pension system: the government is considering ways to make the NPS more attractive

As some opposition-led states announce plans to reintroduce the old Defined Benefit (OPS) pension scheme for their staff and abandon the reform-oriented National Contributory Pension System (NPS), the government of the Union could recommend the annuitization of the entire government contribution to the NPS as an alternative.

The government is also considering allowing employees to invest more than 40% of the NPS corpus in systematic withdrawal plans and inflation-indexed products to increase their retirement income.

Under the NPS, 60% of the accumulated corpus of contributions during a person’s working years can be withdrawn upon retirement. This withdrawal is also tax free. The balance of 40% is invested in annuities which, according to one estimate, could provide a pension equivalent to around 35% of the last salary received. Under OPS, government employees received 50% of their last salary as a pension.

If 60% of the contribution, which roughly corresponds to the central government/state contribution, is made profitable, the NPS pension can be close to 45% of the last salary received. The 5% gap can be filled by the government concerned by contributing a little more to the NPS. This is seen as a much better alternative than bringing back the unsustainable OPS model, an official source said. Employees will also have the possibility to completely withdraw the corpus of their own contribution at the time of the release.

Recently, the Ministry of Finance said in a response to a question in Parliament that a government employee could also provide their full NPS contribution for the annuity, which could increase retirement income to over 50%. of the last salary received.

Since FY20, central government personnel are entitled to a deduction of 24% of salary (10% employee contribution and 14% employer share) for NPS contributions and no less than 15 state governments subsequently increased the share of employers in the NPS. at 14%.

In its FY23 budget, Rajasthan announced a plan to restore the old pension system for all state government employees from next fiscal year and Chhattisgarh has followed suit. If implemented, it could also increase their tax burden.

After the Center rolled out the NPS for all its new employees from January 1, 2004, most major states made it mandatory for their employees in 2004 or 2005, with Rajasthan joining on January 1, 2004 and the Chhattisgarh on November 1, 2004. Both these states were ruled by either the BJP or the Congress during these years. In Tamil Nadu, the ruling DMK had announced ahead of state assembly polls in early 2021 that it would reinstate the OPS. But the DMK government has yet to unveil the program, apparently due to budget constraints. Tamil Nadu manages its NPS corpus independently, while pension funds in other states fall under fund managers appointed by the pension regulator.

As of February 28, 2022, approximately 5.5 million state government employees were registered in the NPS with assets under management (AUM) of Rs 3.61 trillion. There are around 2.27 million central government employees in the scheme with an AUM of Rs 2.15 trillion.

NPS returns are much better than what other superannuation funds offer. For example, public sector underwriters got more than 10% return in FY22 under the NPS compared to 8.1% under the EPFO ​​and around 8% given by a few company-run pension funds. insurance, plans that compete closely with the NPS.

“PAHO makes pensions pay for future generations. There is a risk that governments will default on their payment obligations given its unsustainability, while the NPS has a real corpus that will provide a permanent pension,” said Gautam Bhardwaj, co-founder of pinBox, a global retirement technology engaged in digital microcomputer. the inclusion of pensions in Asia and Africa.

According to a report by the Old Age Social and Income Security Project, the country’s Implicit Retirement Debt (IPD)—central (civilian) employees, state employees, and employees’ pension plan funding shortfall, 1995—has proved to be 64.51% of GDP in nominal terms in 2004. Of course, the actual IPD or net present value of these future promises would have been much higher if the defense pension liability had been included.

“Even today, Central and State OPS pension liabilities are off-balance sheet liabilities and they have been increasing since 2004,” Bhardwaj said.

The pension bill will continue to rise until all employees who joined central government before January 1, 2004 and most major state governments before April 1, 2005 retire. Thereafter, the pension liability will decrease significantly as employees who joined after the stipulated date are funded through the contributory NPS and will not require budget support.

“As life expectancies increase, the pension burden increases and will continue for another two decades until employees eligible for OPS retire. Returning to OPS will put additional strain on the state finances in the long run,” India Ratings Chief Economist DK Pant said.

Institutional measures adopted by state governments (such as the Fiscal Responsibility and Fiscal Management Acts, Value Added Tax) and the NPS have helped them consolidate their finances over the past decade. With the exception of a few exceptional years like FY21, when Covid-19 led to a sudden increase in tax expenditures, states managed to keep their budget deficits around the prudent level of 3% of GDP over the course of the year. last decade.

Fixed overhead in the form of capital expenditures (largely for wages, salaries, bonuses, and pensions) accounts for more than 50% of combined state revenue expenditures.

Despite the demand from employee unions, the Center recently told parliament categorically that it would not reintroduce OPS. “If a subscriber feels the need for a higher annuity, he is free to choose a higher percentage of the corpus (up to 100% maximum) to be used for the purchase of an annuity, which will further provide a higher pension amount,” said the Union Finance Ministry.