Pension ka Tension

 In my last visit to home this July, a Tehsil town called Chandil in Jharkhand, i was greeted with a sort of dhol and baja in the narrow lane of my house. I was wondering since when did i become this popular. Very soon my fractional moments of glory was busted when i heard the slogans of 'Dhanyawad Hemant sarkar for going back to the old pension scheme'. Perplexed with this, i started to google about the issue matter and very soon i realised that the Jharkhand cabinet on 15th July approved to revert to the Old Pension scheme from the NPS. 

For the uninitiated, The old pension scheme (OPS) was an earlier pension scheme where government used to pay pensions to all it's employees based on the last drawn salary (50% of the last drawn salary) followed by indexed dearness relief. This was also a pay as you go scheme where govt made the payment when due without any provision as it is accrued. This was discontinued by the Vajpayee government in Apr 2004 as it was fiscally unsustainable and was replaced by NPS which is a funded scheme where employees make contribution equal to 10% of their salary and employees make 14% contribution. This is a two tier investment vehicle where investors get to decide in four investing options (i.e. Equity, Corporate debt, government bond and alternative investment funds. There are two modes of investment choice, active and auto choice. In active choice you can spread between the 4 options with no more than 75% in equity no more than 5% in alternative investment fund. Under the auto choice, the allocation is automatic based on Investor's age. The savings are pooled into one pension fund and is invested by professional fund managers and regulated by the Pension fund regulatory and development authority (PFRDA). 

The key differences between OPS and NPS are as follows:

- NPS is market linked with no assured returns unlike the OPS which is a fixed benefit scheme

- OPS is tax free but in NPS only 60% of the fund is tax free at redemption. The rest needs to be invested in annuity and is fully taxable

- Third and most important, NPS requires government to create provision now for pension when it is accrued unlike OPS where government need not accrue anything now.

Already Rajasthan and Chhattisgarh government has reverted to OPS as its politically sweet deal to sell due to its assured benefit and also is good for the state governments as they have more fiscal room now (as they don't have to accrue) in their otherwise choking and bleeding finances. Jharkhand is following the suit and will implement it soon. There are growing clamor in other states like MP, Assam, Himachal etc. as well to go back to OPS.

However, this is very short sighted and fiscally unsustainable. The present govt is just pushing it to future governments to bear the brunt of current move. The employees who are hired in 2004 will retire in 2030s and without any provision at accrual, their pension liability will be on future governments and as an extension young generation of that time. 

Economist and student at Institute  & faculty of Actuaries in London, T S Vaidyanathan, has estimated that Rajasthan government's contribution rate for a funded OPS (if govt were to make provision for fixed benefit OPS) will be 50% and the same will be 40% for Chhattisgarh (difference among rates is due to difference in life expectancy in the two states). The same contribution rate under NPS will be 20%. 

In the year 2021-22, the pension contribution of Rajasthan govt is Rs.2732 Cr and the same is Rs.1060 Cr  for Chhattisgarh. These govt might save this amount next year onwards. However, if they created provision for OPS from now (Funded OPS), the contribution would be significantly more than current pension contribution (i.e. Rs.10,932 Cr and Rs. 3122 Cr respectively for Rajasthan and Chhattisgarh). There is no provision created for such a big liability and will be loaded onto future government.

In conclusion, Adam Grant said " Too many people spend their lives being dutiful descendants instead of good ancestors". By deferring liabilities onto future generations for current political and fiscal gains is to become horrible ancestors and we must strive to put an end to the spreading of this old pension virus.

- Jaydeep Daripa

Source: 

1) thehindubusinessline.com/opinion/ops-nps-and-the-ap-alternative/article65481198.ece

2) outlookindia.com/business/old-pension-scheme-vs-new-pension-scheme-know-the-differences-news-186129

3) https://www.financialexpress.com/budget/employers-nps-contribution-of-14-for-state-and-central-government-employees-proposed-by-fm/2422443/

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