Arranging pensions to be paid out of returns on a corpus created by contributions from employees and employers, while investing the corpus funds wisely, is a sound practice
The Unified Pension Scheme (UPS) is the National Pension System (NPS) with an additional, potential top-up out of government funds, in case the pension contribution from the civil servant and his/her employer, the government, do not yield a return large enough to pay out 50 per cent of the average basic pay of the final year of service.
The real question is not whether the UPS is similar to the Old Pension Scheme (OPS) – clearly, it is very different.
Rather, the question the UPS poses is this: If detailed calculations show that it requires 28.5 per cent of a civil servant’s salary to be docked as pension contribution, to enable a monthly pension equivalent to half the final year’s average monthly basic pay, why does the government not institute similar contributions for employees under the NPS as well?
Extend it to other bodies
Further, why is the UPS option not being extended to employees of statutory bodies such as Central universities, and autonomous, government-sponsored agencies, such as CSIR labs and other academic and research organisations, whose retirement plans have been modelled on those of civil servants?
The OPS was abandoned, in favour of the NPS, because of the expectation that it would be fiscally unsustainable, as life expectancy rises, and civil service pay improves in excess of what is needed to neutralise inflation.
How the open-ended, unfunded, pay-as-you-go OPS can be ruinous is best understood by looking at state governments that delay pension payouts, often unconscionably.
Budgetary constraints
The Centre can, at a pinch, print money, that is, borrow from the RBI, to meet its expenditure commitments.
States have a hard budget constraint, and if it is a choice between paying current salaries and paying the pensions of past employees, we can all guess which payment would get priority.
To avoid this fate, it is necessary to fund pensions while the employee is still at work, and pay pensions out of the investment proceeds of those funds.
All old-age pensions are paid, ultimately, from the access pension funds establish to returns on the nation’s productive capacity. Production generates returns on the capital used for the purpose, apart from income for employees.
Two forms of capital
There are two forms of capital: debt and equity. Debt capital earns interest. Equity capital earns profits and capital appreciation, apart from corporate control.
Taxes are paid out of the income generated by production, whether profits, capital gains, interest income or wages and salaries.
Government employees are paid out of taxes, that is, indirectly from the income generated by the production capacity. The interest on government borrowings, too, are paid out of taxes and fresh borrowings, if needed.
Subscribers to pension funds that invest in equity and debt rely on the income generation capacity of the economy’s production base. When civil service pensions rely exclusively on taxes, the pensions depend not just on the production capacity of the economy but also on the government’s ability to collect taxes efficiently, and to manage the fiscal deficit, limiting expenditure so that enough is left over to pay salaries, interest on debt, and pensions, without squeezing other essential expenditure.
Sound practice
Arranging pensions to be paid out of the returns on a corpus created by contributions from employees and employers, while doing a good job of investing the funds accumulating in the pension fund, is a sound practice.
The California Public Employees’ Retirement System (Calpers), the Canada Pension Plan, and the Ontario Teachers’ Pension Plan are notable examples of funded pensions for government employees. These scour the world, including India, for profitable deployment of their resources.
The armed forces in Britain get a pension very much like the UPS, with a government-guaranteed top-up to neutralise inflation, in addition to the return generated on contributions from the service personnel and the government. This is what India should opt for, as well, for its own armed forces.
Poor management can be costly
Pension funds can, of course, be managed poorly and such management can be costly.
In the 1990s, the Employees’ Provident Fund (EPF), a state-sponsored pension scheme for private employees, paid an annual fee of 4 per cent of the funds managed to State Bank of India (SBI) for managing the assets.
In contrast, the asset management fee in the NPS is less than 0.1 per cent. After the NPS was created, asset management charges came down in EPF as well.
Plight of temps
There is a class of employees under the NPS who are getting a raw deal: staff employed in a temporary capacity for long years, sometimes decades, before they are offered regular employment.
They get no pension benefits for the period of their service prior to regular employment, neither the OPS nor the NPS. If they did not get a permanent job because of any shortcoming on their part, that would be understandable. But administrative inertia and lack of funding for staff are to blame.
If the government had followed its own norms for contract workers, which oblige the employer to contribute to the pension kitty for the duration of the employment, this problem would not have arisen.
Penalising the staff in question by shortchanging them on their post-retirement social security is unfair. It also violates several Articles of the Constitution on equality and against arbitrariness.
Opportunity to make amends
The government has a chance to make amends. It should make retrospective contributions to the pension kitty of such employees at the rate that was on offer for other employees in the NPS, plus the accumulated return at the rate of the average yield on government bonds over the period.
Since the employees had not been given a chance to contribute their share during their temporary employment, and the government is paying that amount on their behalf, the extent of their contribution can be deducted from their final payout. The state governments can follow suit for its employees put on temporary service.
The demand for a return to unfunded, pay-as-you-go pensions under the OPS is not justified. The UPS is a definite improvement over the NPS. All government employees, including armed forces personnel, should be brought under the UPS.
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal.)
