National Pension Scheme is, today, in the middle of political thunderstorm.Restlessness is growing among government employees on what is going to be the actual pension in hand under national pension scheme.And such restlessness is no surprise because when two systems exist-one full of certainity(OPS) and another full of uncertainity(NPS), the faultlines are well established to fight over.When National Pension system replaced Old pension scheme(OPS), it was taken as a measure to rationalize the unsustainable pension liabilities of the government.The Old Pension Scheme was blamed for burdening the finances of the government and leaving very less scope for doing developmental expenditure.National Pension System was introduced as an alternative to Old pension scheme which will serve dual purpose -First, to ensure that some kind of pension system is in place for government employees and second, the government liabilities are defined and limited unlike undefined and unlimited in Old Pension System.
However, as the number of NPS employees are increasing, the comparisons are being drawn between old pension scheme and new pension scheme and invariably, most of the NPS employees feel that Old Pension scheme is better than NPS.This sentiment is widespread and has its foundation on the ‘Certainity’ provided under old pension scheme and absolutely no idea of Pension amount in case of New Pension System.For example, A person in Old pension scheme knows that when he retires , he will get 50 percent of his basic plus DA but NPS employee has no clue of his pension as his pension is dependent on market value of his contributions made over the year.Further, an OPS pensioner will get the pension till his death whereas in NPS it is yet not clear that the funds accumulated by the end of service will be able to take care increased longevity after retirement.
Clearly, NPS to government employees is a like black box scheme where they can see their contributions but not the benefits that will acrue to them after retirement.It is also important to understand that Pension is not meant for subsistence but for lifestyle maintenance.Thus, the fears of the NPS employees are not unfounded given the lack of information on the ‘actual pension’ which will be due to them after retirement and whether it will be able to sustain their lifestyle or not.Hence, whenever any government announces a reversion to old pension scheme, NPS employees are happy to buy that idea as it gives them the exact assurance what they are looking for.
But is NPS really an inferior scheme than OPS?NPS is a contributory pension scheme and OPS is a defined benefit scheme but it does not automatically mean that NPS employee with similar service conditions will draw less pension than the OPS employees.But absence of any credible research on this has led to fears that NPS is going to be less beneficial to employees than OPS.To be very true, NPS is on a losing side as of now.For example, a recently inducted group A officer accumulates 15 crores by the end of his service, then he will have buy annuity of minimum 40% of Rs 15 cr i.e. Rs 6 crores.If he buys annuity of this Rs 6 crores, he is likely to get 6 percent of this as his annual pension i.e. Rs 36 lakhs per year which means Rs 3 lacs per month.However, this amount will start 30 years from today which means that at inflation of 6 percent per annum, it is only Rs 52,233 per month as on date.This is half of what a Group A officer will get today when he retires from the service today.Thus, clearly NPS is less attractive to empoyees.Further,whether the corpus of Rs 15 crores taken above also depends that market remains buyount but in case they do not it adds to further reduction in pension amount.Also, whether the annuity providers will give 6 percent return 30 years from now depends on the interest rate environment at that point of time.
However, the above analysis is incomplete without taking taxation into account.Currently, the NPS contributions are tax free which means that NPS employees get tax savings in their present income which OPS employees don’t get.If this advantage is added to the monthly pension than the pension amount will reach upto Rs 70,000.However, it will be still less than Old Pension scheme and will remain dependent on market factors which are subject to both upside and downside.And those employees caught at the wrong end of market may have to suffer a lot because of this.So, there is still some work which is to be done to repose public confidence in NPS otherwise the trend of OPS will keep on spreading especially when it helps the government in power both politically and financially.
Let us be clear, that for political parties announcing reversion to OPS is a win-win scheme.It saves them their present contributions ,defers their liabilities and most importantly creates a strong vote bank among public sector employees.However,NPS by design is not bad as it signals prudence whereby both employee and employer set aside money for future thereby creating a sustainable scheme which can deliver pension without putting stress on government finances.Infact, government can fail to pay old pension scheme in case of financial distress but that cannot happen in NPS as it is given by the annuity providers and are independent of government’s financial position.This is especially true for state governments as many of them are flagging the risk of bankruptcy.
So,what is the way forward for NPS?How can government make it more attractive?The following are few suggestions which government can take up to make NPS more attractive:
1)The pension which an NPS employee will get should be made tax-free just like the tax free status of the corpus.This will jack up the pension by 30 percent which is substantial amount.
2)Government should give target to fund manager for the corpus to be created by the end of service.Any government employee should have an idea of how much corpus he is likely to get.The standard deviation should not be more than 10 percent and in case it is more, government should fund the gap to bring it closer to the target bracket.
3)Government should also assure that minimum annuity interest will not fall below 6 p.a. and in case that happens, government should provide interest rate support to assure that pension.
4)Government should create a corpus from disinvestment proceeds to provide safety cushion to NPS employees in case of adverse market scenario.
The above steps will ensure that NPS is able to ward off the challenge from OPS, otherwise NPS is going to lose battle no matter whatever merit it has for government’s finances or its employees.
Very very useful filled with facts and suggestions are most practical.