Exactly twenty years after it was introduced, the participants in the New Pension Scheme (NPS) are feeling the pinch. Neither the government, nor the trade unions, nor even the beneficiaries – the employees of state and central governments – heeded the economists’ hints and analytical advice at that time. There was a point that the participants had not raised their voices because the scheme was announced before anyone joined the government. It was specifically stated that the NPS would be applicable only to employees hired on or after 1 January 2004.

There was a reason the previous employees did not raise their voices because they were already protected and were unconcerned about the new entrants into the system. There was a point for the government to push it because the private sector strongly lobbied the government to make a quick buck out of the employed class’ retirement funds. However, it was pointless for the trade unions to remain silent. The New Pension Scheme is more about politics and confusion than mathematics and actuarial valuations, as it appears to us. The history of the NPS is not appealing to anyone concerned with the old age income and survivor benefits of retired government employees. The evening years of their lives were gradually and quietly dimmed.

The Ministry of Social Justice and Empowerment, Government of India, launched Project OASIS (Old Age Social and Income Security) in August 1998, claiming its stake as a provider of old-age security to the population as a measure of social justice. The original mandate and focus of the Project OASIS expert committee was on the ninety per cent of workers who were not covered by any pension scheme in India; however, it made departure from its mandate and made a ‘paradigm shift’ in advising reforms to civil service pensions in India on the premise that the government’s finances are under pressure due to an ageing civil service.

The project work was assigned to a privately managed economic foundation in Mumbai, with interests in financial and capital market education in India, as well as encouraging private investments and private fund managers. The foundation believed the Ministry of Social Justice and Empowerment recognised that poverty alleviation programmes aimed at the elderly alone cannot solve our elderly’s income and social security problems; the problem must be addressed through thrift and self-help, in which people save for old age during their working lives. The government’s role in this endeavour could be to build the necessary institutional infrastructure in collaboration with the private sector to enable and encourage each citizen to take on this task.

Based on the foregoing, the expert committee under Project OASIS proposed an individual contribution-based, non-benefit guaranteed, non-return guaranteed, non-accumulation guaranteed pension scheme for the unorganised sector, to be managed by private fund managers, in which contributions of Rs. 5 to Rs. 10 per day per worker flowed into the system and were expected to generate wealth for their old age. If it were to be accepted and implemented, a major advocacy campaign would be required to rally support from informal workers, collect their shares, invest in the markets, earn profits, and ask them to wait until they reached the age of sixty. Instead, the foundation targeted government employees across the country, where money could flow into their investment businesses with a single government order; and they were successful in convincing the government to replace the old defined benefit social security pension with contribution-based NPS for civil servants hired on or after 1 January 2004.

The General Provident Fund was abolished and replaced with a voluntary Tier II benefit under the new pension system. The New Pension Scheme would operate on a defined contribution basis and will have two tiers. Tier I is required for all government employees who begin their careers on or after 1 January 2004. In Tier I, government employees must contribute 10 per cent of their basic pay, Dearness Pay, and Dearness Allowance, which will be deducted from their monthly salary bill.

The government will make an equal matching contribution. At exit, he must invest 40 per cent of his pension wealth in an annuity (from an IRDA-regulated Life Insurance Company), which will provide pension for the employee and his dependent parents/ employee for the rest of his life. If a government employee leaves the scheme before reaching the age of 60, the mandatory annuitisation would be 80 per cent of the pension wealth. The quantum of benefit is not defined. This is a departure from a defined benefit pension scheme. In the old system, government employees knew that their pension would be 50 per cent of their last salary if they served at least 25 years or proportionate to the service. The benefit in NPS is unknown.

Neither the return on accumulated capital nor the return on investment is guaranteed. In addition, there is no family pension. According to the original proposals, employee contributions would be invested in the market of their choosing. Employee financial literacy issues were ignored. The funniest part is that under the old system, the government paid pensions to employees only after they retired. The burden of all employees is not immediate.

The government pays a monthly contribution to private fund managers under NPS, in addition to a pension to the old cohorts. The burden on the exchequer has increased rather than decreased. Only the central government knows how wise the decision to carry two burdens at once under the guise of reducing the burden on the exchequer is.

(The writer is former International Senior Adviser, United Nations Development Programme.)