Centre to set up panel to improve pension scheme

The central government has decided to set up a committee to recommend changes to make the politically-sensitive National Pension System (NPS), Union finance minister Nirmala Sitharaman said on Friday.

The central government has decided to set up a committee to recommend changes to make the politically-sensitive National Pension System (NPS), Union finance minister Nirmala Sitharaman said on Friday, amid widespread opposition to the new pension savings system that is seen to have cost the Bharatiya Janata Party (BJP) popularity.

Union finance minister Nirmala Sitharaman speaks in the Lok Sabha during the second phase of the Budget Session of the Parliament, in New Delhi on Friday. (ANI)

The decision came as several opposition-ruled states started reverting to the Old Pension Scheme (OPS) and making it a poll issue after several employee organisations sought the system to be rolled back for better financial security after retirement.

“Representations have been received that the National Pension System for government employees needs to be improved. I propose to set up a committee under the finance secretary to look into this issue… and evolve an approach which addresses the needs of employees while maintaining fiscal prudence to protect the common citizens. The approach will be designed for adoption by both central and state governments,” Sitharaman told the Lok Sabha while moving the Finance Bill 2023 for consideration and passage.

States that have asked the Centre to revert to OPS include Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh and are demanding a refund of the corpus accumulated under the NPS.

The OPS was a financially extravagant but politically popular scheme. The move comes with just a year left for the Lok Sabha election.

Among those supporting its return is Maharashtra CM Eknath Shinde, a BJP ally, who announced last month that his government would consider shifting to the Old Pension Scheme.

In the budget session last year, the Union government told the Lok Sabha there is “no proposal” being considered to restore OPS. In a written reply to Parliament, the government also clarified there are no provisions to refund the contribution in the NPS, along with accruals, back to the state governments.

Decades after all states migrated to the National Pension System (NPS), the Congress-ruled states of Rajasthan and Chhattisgarh, AAP-ruled Punjab and JMM-led Jharkhand announced they will go back to the old way of providing for pensions, which is essentially a “pay as you go” scheme.

The NPS was brought during Atal Bihari Vajpayee’s government and rolled out on January 1, 2004. When the Narendra Modi government came to power, it offered tax benefits on the scheme to make it popular.

At the heart of the old “pay as you go scheme”, operational till 2004, lay an intergenerational disparity, according to analysts. Under it, contributions from the current generation of workers were used to pay for pensions of current pensioners, making it an unfunded pension scheme because it represented a direct transfer of resources from the current generation of taxpayers to fund the pensions.

This meant that the old system was fiscally ruinous, according to Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, the country’s largest lender.

What made the OPS politically attractive is that it offers an assured benefit to the retiree, fixed at 50% of the last drawn basic pay. Also, like salaries, pensions were also increased with hikes in dearness allowance, essentially to account for inflation.

“Any return to the old scheme will not be fiscally viable,” Ghosh said.

According to Ghosh’s research, pension liabilities of state governments over the long term showed a sharp increase. The compounded annual growth in pension liabilities for the 12-year period ended 2021-22 was 34% for all state governments. As of 2020-21, the pension outgo as a percentage of revenue receipts stood at 13.2%, Ghosh said.

Shinde’s comments, made during his campaign for the state legislative council polls, in Sindhudurg district on Thursday, gain significance as just three weeks ago, his deputy Devendra Fadnavis had said during a campaign speech that he was not “negative” about OPS.