New Pension System (NPS) came under existential crisis especially after many states reverted to Old Pension Scheme (OPS). However, it is to the credit of central government that it has intervened and found a middle ground to arrest further spread of Old Pension Scheme. This is important in two ways: firstly, it continues contribution by both employees and government so that future generations don’t have to pay heavily for pensions; secondly, it reduces the constant comparison by NPS employees with their OPS peers which was generating discontent in government.

Unified pension system (UPS) tries to unify the best features of both the pension schemes. It provides defined benefit pension like OPS but employee and government are supposed to contribute regularly to pension fund unlike OPS, where future governments had to take care of pension liability created by past governments. However, the bigger question is that whether the higher contribution of government and consistent contribution by employees will be able to create a corpus high enough to take care of pension liabilities. Is this really a reform over NPS? Or is it a step back in time? Or is it time to make India’s pension architecture more focussed and accountable?

To be sure, UPS is not as financially sustainable as it claims to be. It faces a number of risks which can lead to huge financial burden in future. First risk is that of longevity. The average life span of Indians is increasing and the trend is likely to remain firm in future. Secondly, India like any other developed country is moving towards low interest regime. As India develops further, interest rates are likely to drop further. Annuity schemes are heavily linked to interest rates and they will also start giving lower returns. Thirdly, India’s current Pension schemes especially the default ones are also dependent on interest income and will also give lower returns if the interest rates fall further.   Thus, the shortfall which government is anticipating to bridge is likely to increase with time and will make it challenging for future governments to discharge their liabilities.

Unified Pension Scheme is incomplete and unsustainable without reforming India’s pension architecture. New pension system has put a market linked architecture for discharging future liabilities. However, this architecture is not as focussed as it should be and also lacks accountability. It is pertinent to note that Government has decided that corpus, which is generated using ‘default investment option’ of PFRDA, will be used to buy an annuity at the time of an individual’s retirement. And, the gap between annuity amount and assured pension amount will be funded by government’s own resources. Interestingly, ‘default option’ in NPS is 85% dependent on fixed income which can never generate returns enough to provide an assured pension which is linked to inflation.

Global pension fund management, however, is drastically different from default option used by NPS. Canadian pension system has an active management across different asset classes like public equity, private equity, real estate etc. Similarly, Norway pension fund, which is a passive fund, maintains 60% exposure to equity. India needs to emulate a pension fund strategy that maximizes returns especially now when government has offered assured pension scheme. It is a risk not only worthwhile but essential to make this scheme sustainable. Secondly, PFRDA should be made accountable to parliament if the pension funds are not able to generate minimum benchmark return. This is important to create seriousness about pursuing higher returns.

In a nutshell, the success of UPS depends on efficient pension fund management and that is the aspect the government has left untouched. Current Pension fund management in India is focussed on preservation of capital rather than on creation of wealth. However, it is the creation of wealth that needs to be pursued to make UPS sustainable. Thus, government should focus on generating high returns from the corpus created through this scheme by allowing diversification to different asset classes. This will require professionalising India’s fund management and making it accountable to Parliament so that abuse of such discretion doesn’t take place.