Govt employees' pension: 'Old versus new' debate gathers momentum

Reverting to OPS is being considered an easier option from a political standpoint, but could financially stress the states

A debate on comparative advantages of the old pension system (OPS) and the new pension system (NPS) has resurfaced again after the debt-stressed Punjab government said it is considering reverting to the former. The Chhattisgarh and Rajasthan governments have already embraced OPS.

Besides, the Congress too promised voters in Gujarat on Monday that it would replace NPS with OPS if voted to power in the state assembly elections, due later this year.

While NPS has defined contributions from employers and employees, OPS has assured benefits. The pension regulator, PFRDA, is also in the process of introducing a product that would give assured returns under NPS. Other than that product, there is no assurance on the rate of returns under NPS, even as it is currently higher than the returns offered by other schemes.

Those who joined central government service on or after January 1, 2004 are covered under NPS where the government and employees contribute equally to the corpus. The funds are invested in debt or equity, according to employee's choice and given guidelines. Later all state governments, except West Bengal, came into the NPS fold. But now, Chhattisgarh and Rajasthan have reverted to OPS, while Punjab is considering it.

Under OPS, once an employee retires, he gets a portion of his last drawn salary--usually 50 per cent--as pension every month, with dearness relief linked to inflation announced every six months.

Chhattisgarh, Rajasthan and Punjab had adopted NPS on January 1, 2004.  

So why have opposition-ruled state governments adopted or are considering reverting to OPS over 18 years after NPS was introduced?

Former interim PFRDA Chairman D Swarup said reverting to the old pension system will create financial stress for the state exchequer but even then some states are embracing it.  

He pointed out that the Centre has adopted a new pension system starting January 1, 2004, which was adopted by every state, save West Bengal. "What has happened in these years that has prompted the states to revert to OPS," he wondered.

Earlier, the Rajasthan government had said NPS had created insecurity among government employees.

"To conclude that the NPS has created insecurity among government staff and hence is worrisome, is premature. People have not even explored the benefits of this scheme, as those who joined government service after January one, 2004 have not retired," Swarup said.

Swarup, in fact, asserted that NPS does not contain any policy risk that is attached to OPS.

"There is no policy risk under NPS. Technically speaking, there could have been a policy risk. The Central government will never be short of funds. But let us assume a particular state does not have money to pay salaries and pensions. (In such as scenario) There could be a default under OPS," he said.

Gautam Bhardwaj, co-founder and director of pinBox Solutions, which helps design and build digital micro-pension systems in Asia, Africa and Latin American and the Caribbean (LAC) region, said, "My sense is that the states have an inadequate understanding of reversing the reform. They are unable to calculate the liability that would arise from reverting to OPS. Politically, it is being considered an easy option."

He referred to a study, authored by him and first Sebi chairman Surendra A Dave, which showed that the implicit pension debt (IPD) constituted almost 65 per cent of India's gross domestic product (GDP) in 2006-07. IPD is the net present value of the future pension promises made to central and state government staff and a few others, along with the funding gap of employees' pension scheme of the Employees' Provident Fund Organisation (EPFO).

Bhardwaj said the states need to recognise that a lot of understanding has gone into NPS and there was a consensus between them and the Centre that OPS was a time bomb.

The money that will go into pension of the government employees could be used on education, health and infrastructure, he added.

Punjab's finances are particularly shaky, with the pension to be given by the government projected to be Rs 15,146 crore during 2022-23. This would constitute a third of the state's own tax revenues (OTR) of Rs 45,588 crore for the year. If one were to add the other two committed expenditures--salary and interest-- the total outgo of the state would be Rs 66,440 crore for FY23 which would exceed the state's OTR by almost 46 per cent. Punjab's outstanding liability is projected to be 48.5 per cent of its gross state domestic product (GSDP) for the year.  

It is too early to say which party would form the government in Gujarat, as the elections to the state assembly are yet to be announced. However, Gujarat is better placed than many other states financially. Its pension outgo for 2022-23 is pegged at Rs 17,590 crore which is 15.31 per cent of its OTR at Rs 1.15 trillion. Adding salaries and interest payments, the committed expenditure of the state is projected to be Rs 82,731 crore, which is 72 per cent of its OTR for FY23. Public debt is projected to be close to 16 per cent of its GSDP for the year.

On Monday, Punjab chief minister Bhagwant Mann tweeted, "My government is considering reverting to the Old Pension System. I have asked my chief secretary to study the feasibility and modalities of its implementation. We stand committed to the welfare of our employees."

Senior Congress leader in Gujarat, Arjun Modhwadia, had told reporters the Congress will do the same as done by its governments in Chhattisgarh and Rajasthan, in case the party was voted to power in Gujarat.

"It is our promise to all the employees in Gujarat who joined on or after 2004 that we will do the same here when voted to power," he said.

The staunch defence of OPS by some states reminds one of the vociferous defence of this pension system by then West Bengal finance minister Asim Dasgupta at a meeting of the states called by then union finance ministry back in 2007 to sell the idea of NPS.

At the end of the meeting, Chidambaram had briefed journalists on the virtues of NPS, immediately followed by Dasgupta who expressed fears about the pitfalls of the pension system that was being advocated.

At that time, the Union Finance Ministry had made an estimate of the rise in pension expenditure and increase in the ratio of pension expenditure to tax revenue taking the entire period 1993-94 to 2004-05 as a whole, and indicated a compound growth rate of pension expenditure of around 21 per cent for the central government and 27 per cent for the states. It also estimated an increase in the ratio of pension expenditure to tax revenue from 9.7 per cent to 12.6 per cent for the central government and from 5.4 per cent to more than 10 per cent for the states from 1993-94 to 2004-05. On the basis of the trend rate of pension expenditure and tax revenue over this period (1993-94 to 2004-05) as a whole, the projection has been made by the ministry for financial unsustainability in terms of rise in pension-tax revenue ratio.

Dasgupta, on the other hand, had rubbished the claim saying that the union finance ministry did not take the relevant period. If it takes the period after value added tax (VAT) was implemented in states, the figures would present a different picture. VAT was implemented in a majority of states from April 1, 2005. According to Dasgupta, the growth rate of tax revenue of the states had increased significantly post-VAT–– from a historic rate of growth of 12 per cent of sales tax revenue a year to more than 20 per cent growth rate of VAT revenue a year. He also said that the rate of growth of pension has also started falling in recent years. For West Bengal, for instance, during the last three financial years (2004-05, 2005-06 and 2006-07), growth in pension expenditure has been generally below 10 per cent, he had said.)

Arguments given by Dasgupta did not find many takers and after much delay the Pension Fund Regulatory and Development Authority (PFRDA) Bill was passed in 2013 by the UPA government, though NPS was made mandatory for central government employees from January one, 2004 with a few exceptions. However, West Bengal has its own apprehension of the scheme despite change in the ruling party. This apprehension has spread to a few other states, ruled by the opposition.