Rajasthan govt move to replace NPS with Old Pension Scheme sparks debate

The promise by the SP and the BSP in the ongoing Uttar Pradesh Assembly elections that they will revive the Old Pension Scheme (OPS) was dismissed as a political rhetoric by many

Rajasthan government's announcement on replacing the new pension system (NPS) with the old pension system (OPS) has ignited the debate on the two sets of old-age safety nets which many thought was a settled issue.

It's not that the unions have not been demanding restoration of the old pension system, but people thought that it was just a demand which would never be met. In fact, the promise by the Samajwadi Party and the Bahujan Samaj Party in the ongoing Uttar Pradesh Assembly elections that they would revive the OPS was also dismissed by many as political rhetoric.

The perception has changed since Rajasthan Chief Minister Ashok Gehlot announced in the Budget that those who joined the state government services from January 1, 2004, would be covered under OPS from next financial year.

"My fear is other states will follow Rajasthan now," said a former official of the Pension Fund Regulatory and Development Authority (PFRDA).

Sadhu Singh, secretary general of the Government Employees National Confederation, said other states should also follow Rajasthan's move as NPS has instilled insecurity among the government employees. The confederation is affiliated to the RSS-backed Bharatiya Mazdoor Sangh.

In fact, Gehlot in his Budget speech said that NPS has created a sense of insecurity among the employees who have joined the state government from April 1, 2004, as to how will they survive after their retirement.

Those joining government service from January 1, 2004 are covered under NPS where the government and employees contribute an equal portion of funds which are invested in debt or equities according to employee's choice and given guidelines.

This is quite different from OPS where employees on their retirement used to get a portion of his last drawn salary, usually 50 per cent, as pension with dearness relief linked to inflation announced every 6 months.

Former interim PFRDA Chairman D Swarup believes that it is premature to say that employees are instilled with insecurity when they are yet to retire.

"Coming to a view that the new pension system has created insecurity among government employees and hence it is worrisome, to my mind, is premature. People have not even seen as to what are the benefits of this scheme as those who have joined the government service after January one, 2004 have not retired," Swarup told Business Standard.

Rather, he said that NPS does not contain any policy risk that OPS has.

"There is no policy risk any more. Technically speaking, there could have been a  policy risk. Central government will never be short of funds. But let us assume a particular state government does not have money to pay salaries and pensions. There could be a default under the old scheme," he said.

PFRDA Chairman Supratim Bandyopadhyay refused to be drawn into controversy over Rajasthan's move.

He said OPS and NPS are two different schemes. "You can compare apples with apples only. In OPS your benefit is defined irrespective of your contribution, and in NPS your contribution is defined. These two schemes are not comparable," he added.

P Chidambaram, who was finance minister when PFRDA law was enacted to give statutory powers to the pension regulator, declined to comment, saying he needs to study Rajasthan government's step.

Gehlot had said that the step to switch to NPS was probably taken due to the financial burden that OPS created on the government.

Swarup said, "To say that NPS amounts to savings on the part of the government is an  incorrect statement. This is so because the government instead of extinguishing its liability post-retirement, is extinguishing its liability upfront every month."

Deepesh Raghaw, Founder of PersonalFinancePlan, called the step to revert to OPS as a retrograde and anti-reform measure. He said politicians don't bother about liabilities as it would shift to successive governments.

The staunch defence of OPS by the Rajasthan government 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 way 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.) – for online.

Arguments given by Dasgupta did not find many takers and after much delay Pension Fund Regulatory and Development Authority (PFRDA) Bill was passed in 2013 by the UPA government as cited above, 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. Today, every state has NPS, except West Bengal.