The National Pension Scheme, the government’s ambitious pension program aimed at unburdening the Union and state governments of massive future pension liabilities, has been dealt another blow. The future of NPS is uncertain now with Rajasthan and Chhattisgarh announcing that they will restore the statutory pension scheme. Now with the four non-confirming states — Tamil Nadu and West Bengal had never joined the scheme — other states have also joined the chorus against the NPS, demanding the restoration of the old pension scheme. This includes BJP-ruled Himachal Pradesh and Madhya Pradesh.
The question now arises whether India can afford to go back to the old pension scheme or maybe the policymakers need to look around the world to find better solutions to the pension problem.
Chhattisgarh became the first state in the country to restore the old pension scheme followed by Rajasthan which recently walked out of it. The move has been made in the interest of government officials and employees and aims to provide assured income to retired employees. Under the old pension scheme, employees were given 50 per cent of their last drawn salary as pension, making the returns defined. The scheme was done away with in December 2003 by the BJP-led NDA government at the Centre. The NPS has been effective from April 1, 2004.
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National Pension Scheme vs statutory pension
Before 2004, the country used to have PAYG scheme in place where beneficiaries got to decide how much to contribute towards their retirement fund either by stipulated deductions from salary or contributing a lump sum amount. The then current generation of payers were actually paying for the pensions of the retirees. While the scheme was in vogue in most countries till 1990s, it was discontinued given the problem of pension debt sustainability, an aging population, an incentive for early retirement and explicit burden on future generations.
The national pension scheme was introduced to help the government get rid of pension liabilities. The scheme allows for voluntary contributions aimed at retirement savings. Under this, subscribers are expected to make defined contributions and plan savings for a secure future, allowing government employees to decide where they want to invest their money.
After retirement, the employees can withdraw a part of the pension amount in lump sum and use the rest to buy an annuity for a regular income. Unlike the old pension scheme where the returns were predefined, NPS is investment-return based. Both the government and employees are expected to contribute an equal amount towards the pension fund. NPS is open for all residential and non-residential Indians who fall under the age of 18-70. Before NPS, the country’s pension debts were reaching uncontrollable levels.
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The Chhattisgarh government proposed to the Pension Fund Regulatory and Development Authority (PFRDA) that it should be allowed to withdraw Rs 17,000 crore which has accrued under the National Pension Scheme since November 2004. The state government then implemented the old pension scheme from April 1, 2022. With it, Chhattisgarh also abolished the 10% deduction for monthly contribution from the salary of government employees as it will no longer be contributed to the national pension scheme.
The Union government has, however, rejected a similar request made by the Rajasthan government as the latter sought to withdraw Rs 39,000 crore accrued under the National Pension Scheme since 2004. The Rajasthan government had said that it would divert the withdrawn funds accrued since 2004 to the general provident fund. PFRDA has found itself in a fix in the absence of a legal way under which it can return the funds separately made by the two states. NPS currently has Rs 35 trillion worth assets and an AUM of Rs 7.4 trillion with 5.33 crore subscribers across central and state government corporates and retail subscribers.
What India can learn from other countries
As far as the current pension schemes go, Nordic countries lead the way in making the best pension schemes for their citizens to support them in their old age. Denmark, Iceland, and Netherlands top the charts while India is among the bottom in the list making the country less equipped to help its aging citizens, according to the latest report on Global Pension Index by Mercer CFA Institute.
Iceland, for example, offers a state pension with two components. One is a mandatory contribution from both employees and employers, and optional contributions to state-approved pension products. The result is a high contribution rate which ultimately results in a generous state pension that retirees in Iceland can tap into once they are of age. The country has also closed the gender gap in pensions, meaning the difference between the average female pension versus male pension is relatively small.
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Countries have started to look for intense pension reforms and are often opting for an increased use of funded pension programs managed by the private sector, according to a recent report by OECD. There is a burning need among policy makers and the regulatory community as well as among private sector participants to compare and learn program developments and experiences to those of other countries. Pensions are crucial in delivering retirement income security not only to individuals, but investment of pension assets are also likely to affect securities markets in future years.
Several experts are of the opinion that India’s pension scheme needs a lot of fine tuning. For starters, the NPS currently only covers government employees, but there is a need for a comprehensive pension plan which can cover all the citizens of the country. Currently, a statutory pension scheme is in place, but it covers only a miniscule section of the country’s population.
The system is inadequate as just 12% or 58 million working people (according to the 2011 census) are eligible for pension in a country which has a population of 1.39 billion. States shoulder a large part of the pension burden and the problem has become acute in states such as Kerala where one-fifth or more than 20% of its current revenue gets spent for paying pensions. Moreover, nearly 88% of the Indian workforce is employed in the unorganized sector leaving them with no safety net in old age.
India is currently finding problems in moving over to a comprehensive pension system because the statutory pension is a major burden and it is not contributory in nature. The pension system was established when the life expectancy was 32 years and a lesser number of people joined government services. However, over time, the salaries have ballooned because of Union activities. The life expectancy too has increased to 70 years.
The need of the hour is to bring all statutory pensioners under the National Pension Scheme, say experts working in the area. The country may also look to other foreign countries who have successfully brought all of their citizens under the safety net of a well thought out pension scheme.