Returning to old pension scheme may not be easy

Reblogged-http://www.thehindu.com/news/cities/chennai/old-pension-system/article8991556.ece

Experts say it will leave the State government without funds given its present financial position

: Opposition to the New Pension Scheme (NPS) continues in Tamil Nadu with political parties backing the demand of the State government employees to revert to the Old Pension Scheme (OPS).

However, there is considerable uncertainty over whether it would be feasible for the State to revert to the old pension scheme and over the financial viability of such a move.

Both the major Dravidian parties have backed the State government employees, who are worried over the unpredictable nature of their retirement corpus under the NPS.

Earlier this year, the government had appointed a panel headed by the former IAS officer Shanta Sheela Nair, via a government order of February 26, 2016, with a term of four months to review the NPS.

Finance Minister O. Panneerselvam told the Assembly recently that the panel had been given three months’ extension to submit its report.

Nuts and bolts of NPS

The Contributory Pension Scheme or the NPS is applicable to those who had joined government service in regular time-scale on or after April 1, 2003, differs from the old scheme in terms of the way the contribution is calculated and on withdrawal benefits.

Under the new scheme, the employer (the State government in this case) and the employee contribute for building a pension corpus payable at the time of retirement by way of annuity/lumpsum withdrawal as per norms. The employee makes a contribution of 10 per cent of his or her basic pay + grade pay + dearness allowance as mandatory contribution to the scheme. The Government makes a matching contribution. In the old scheme, the contribution was based on the last pay drawn of the employee (usually 50 per cent).

Another contentious feature of the NPS is that the employee can exit the scheme at or after the age of 60, and at the time of exit, it would be mandatory for him/her to invest 40 per cent of pension wealth to purchase an annuity scheme from an authorised insurance company which would provide pension during the lifetime of the employee.

The amount would depend on the market returns of the securities (government securities) which the insurance company invests in. There was no such restriction in the OPS.

“Employees are uncertain about the amount they would get after retirement which is the major cause of concern. The amount is linked to the financial risk in the sense it is linked to market returns. That is why we are demanding restoration of the OPS,” R. Muthu Sundaram, chairman, All India State Government Employees Federation (AISGEF), told The Hindu.

However, an official at the Pension Fund Regulatory and Development Authority, requesting anonymity, said it would be difficult for States to revert to the OPS. But he did not elaborate.

R. Vaidyanathan, professor of Finance at the Indian Institute of Management, Bengaluru, agreed, saying any reversion would mean that the State has to meet the additional expenses.

In such a scenario, “the State government (would go) is broke.”

According to a discussion paper on Pension Reforms and New Pension System, the annual average increase in State pension expenditure in the period 1995-96 to 2000-01 was 27.1 per cent. State pension payments increased by Rs. 5,107 crore to Rs. 38,370 crore in 2004-05 from Rs. 33,263 crore in 1993-94.

It said 11 States had pension expenditure that was higher than the expenditure on administrative services. These States are Andhra Pradesh, Bihar, Goa, Gujarat, Himachal Pradesh, Karnataka, Kerala, Odisha, Rajasthan, Tamil Nadu and West Bengal.

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