Pulling out of NPS is fiscally imprudent; other states might emulate Rajasthan

Reversing a reform measure which it has implemented since 2004 along with the central government, Rajasthan will revert to the old pension system for its government employees from next year. This will strain the state’s already stretched finances. It’s not fair on future taxpayers, who will have to pay for the pensions of those currently in service. It also does not do justice to the old and the indigent who have little or no old age income support. Rajasthan’s example might have a ripple effect and other states might follow.

Under the old system, the pension benefit is defined. It is a share, usually half, of the salary drawn at the time of retirement. The pay-out is indexed to inflation. The contribution is made entirely by the government.

To contain the high and rising salary and pension bill of its employees, the central government implemented the National Pension System for its employees joining on or after January 1, 2004. State governments (except West Bengal) also acceded to it. Here the pension contribution is defined. Employees contribute a share – 10 per cent – of their salary and dearness allowance every month and the government as employer contributes a similar or higher amount. The central government contributes 14 per cent. This goes into the subscriber’s account which is held by the NPS Trust. The funds are invested by managers who are selected on a competitive basis. They are invested in government securities, high-rated corporate bonds and equities. These investments are held by banks as custodians. The accumulated money cannot be withdrawn except at the time of retirement, when up to 60 per cent can be taken out and the rest has to be invested in annuities that pay a monthly income. If an annuity is not bought, the amount is taxed.

With NPS, the pension liability of the government is limited to the contribution it makes. It gets extinguished with the contribution and is not carried into the future. Subscribers have three investment options, depending on their risk appetite and risk profile. Subscribers can opt for the safe option where all the money is invested in government securities but earns a lower return. Young subscribers can opt for a greater share of equity investments. As they advance in age, the share that can be invested in stocks gets reduced.

According to the NPS Trust, state employee subscriber funds amounted to ₹3.55 lakh crore as of February. The three fund managers had delivered annualised returns of 9.61 per cent, 9.65 per cent and 9.69 per cent since inception, that is, June 2009. This is better than returns form Employee Provident Fund, Public Provident Fund and fixed deposits. Not only would employees have accumulated a tidy sum at the time of retirement, they will also get the amount accruing in their accounts if they leave service prematurely. In the earlier system, they would get pension only on completion of certain years of service. Conversely, if they die prematurely in service, the family will have to settle for less unlike under the old scheme.

No one has retired under the new pension system. The first retirements will happen in 2035. So, it is hard to say with certainty what their pension will be. Gautham Bhardwaj, who was one of the authors of the Oasis (Old Age Social and Income Security) Report of 2000 says of NPS that “the overall corpus in individual accounts will be very high.” The report formed the basis for NPS.

The old pension system has the benefit of familiarity. The amount one will get as pension is known. Rajasthan Chief Minister Ashok Gehlot, who also holds the finance portfolio, has played on this. The state was reversing course because employees were worried about their post-retirement security under NPS. They would not be able to give their best if they felt insecure, he said.

But Rajasthan’s finances are stretched. According to the Comptroller & Auditor General’s (CAG) report on the state’s 2019-2020 finances, the salary and wages bill of ₹49,066 crore plus the pension outgo of ₹20,761 crore was more than the state’s own tax revenue of ₹59,245 crore. The salary and wages bill as a share of revenue expenditure had risen from 34.50 per cent in 2015-2016 to 39.56 per cent in 2019-2020, after touching 42.05 per cent the previous year. Expenditure on pensions as a share of revenue expenditure had grown from 10.23 per cent in 2015-2016 to 11.76 per cent in 2019-2020, reversing a decline from 9.55 per cent in 2016-2018.

By pulling out of NPS, Rajasthan will save on NPS contributions. According to former home secretary Rajiv Mehrishi and Ranu Sane, an associate professor at NIPFP, a Delhi-based research body, Rajasthan spent ₹23,000 in pension and contributed ₹29,000 crore to NPS in 2021-2022. The state has 5.5 lakh NPS employees and their number will increase by 30,000 a year. The NPS contributions will also rise by at least 7.5 per cent a year.

Dhirendra Swarup, the first Chairman of the Pension Fund Regulatory Authority of India, says the chances of state government reneging on their pension commitment is nil under NPS (though there are instances of states delaying their contributions, which impacts NPS returns). He says it is beneficial to employees. In the old system, there is a risk of financially stretched states delaying pension payments and even reducing the benefit.

In NPS, the returns are market-linked. So, there is market risk. The annuity payments depend on the interest rates prevailing in the year of retirement, though subscribers can postpone withdrawals till market conditions improve.

To further reassure subscribers, the pension regulator is contemplating a minimum assured returns scheme (MARS).

Rather than coddling their employees who are well-paid and have secure jobs, it would be fair and just for states to extend social security benefits to those who are not at all, or scantily covered. Rajasthan offers income support of ₹750-1,000 to eight million senior citizens, widows, disabled persons and orphans. This is too low. It should not only enhance this amount but also extend the coverage of pensions to workers in the informal sector.

Currently, there is Atal Pension Yojana for subscribers in the informal sector. It is like NPS and is open to workers up to 40 years of age. For small monthly contributions, the government assures them of pension ranging from ₹1,000 to ₹5,000 a month from the 61st year. As at the end of March last year, it had 34.17 million subscribers. Their accumulated amount was ₹20,000 crore. But 5.1 million state government employee subscribers had assets worth ₹2.91 lakh crore under management. This shows the scale of disparity.

Bhardwaj says the purpose of NPS was not only to bring transparency into government pensions but also to provide old age income security to those in the informal sector. His Singapore-based start-up, pinBox Solutions addresses this segment. It offers ‘gift a pension’ scheme to employers of say, domestic workers and has tied up with WhatsApp to extend the reach and make it easy for subscribers to get on board. The state government owes a responsibility to this segment as well and not just to their employees.