Ever since, the employed class in Central government and state governments started feeling the pinch of the new pension scheme, which neither guarantees the principle amount nor the interest thereon at a fixed rate, nor offers a family pension to the deceased pensioner, the political parties that were not in power or craving to be in power promised that they would bring back the old pension scheme that guarantees a maximum fifty per cent of the last salary drawn to employees if they worked for a full term, and a family pension to their spouses after the death of pensioners.
The current pensions system which is also called New Pension Scheme (NPS) is contribution-based, which is invested in the market and returns on which are subject to market risks. That is not in fine print but boldly explained when the NPS was introduced in 2004. State governments in Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh have informed the Central Government/Pension Fund Regulatory Development Authority (PFRDA) about their decision to revert to the Old Pension Scheme (OPS) for their government employees. Rahul Gandhi too sounded a shift to OPS if he was elected to power.
The Andhra Pradesh government is the one that promised to get back to OPS during the 2018 elections but went back on its stand, and now Mr. Chandra Babu Naidu, who is an ally of Prime Minister Modi, is doubtful if he could revert to the old system. Historically, with the assurance to offer workers in the informal sector a comprehensive contributory social security vehicle, a new pension scheme was designed with the engagement of private financial companies in January 2004. Instead, it was directly thrust on employees in the Central and State Government, and Public Sector organisations. Two decades after it was introduced, the participants in the scheme are now realising that the NPS is neither social nor secure.
Neither the government, nor the trade unions, nor even the beneficiaries ~ the employees of state and central governments ~ heeded economists’ hints and analytical advice at that time. There was a reason why they were silent. The first point was that today’s agitators or participants had not raised their voices because the scheme was announced before they joined government service. Then it was specifically stated that the NPS would be applicable only to employees hired on or after 1 January 2004; thus, there was no case for the already employed to agitate for the stoppage of the NPS. There was a reason why the previous employees did not raise their voices. They were promised that their retirement benefits would not be affected by the changes.
The entrants had no voice; they obviously looked only at the government job on offer and not at the retiral benefits. They were neither unionised nor were they in one geographical place to unite and fight, nor were they members of already existing unions. Thus, they became voiceless. The second point was that the central government was under pressure to park its funds in the private money market under the threat that pension payments on a later date would exceed the other commitments of the government because the pensioners were not dying early and the ageing population was a ticking time bomb. The New Pension Scheme was 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.
How wise the Government of India is incomprehensible even today when it is paying contributions to the new entrants, and pensions to the old cohorts, maintaining individual accounts, investing the funds in the market, observing the market fluctuations, paying commissions to the private fund managers and so on. 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 a 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 were 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 that the Ministry of Social Justice and Empowerment recognised that poverty alleviation programmes aimed at the elderly alone cannot solve their income and social security problems; the problem must be addressed through thrift and self-help, in which the 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 flowing into the system was 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 private foundation targeted government employees across the country, where money could flow into their investment businesses instantly with a single government order; and they were successful in convincing the government to replace the old defined benefit social security pension with contributionbased 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 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. The government will make a 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 for the rest of his life. If a government employee leaves the scheme before reaching the age of 60, the mandatory annuity 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. Employees’ 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 was not immediate, and the Government did not feel the burden.
It was treated as deferred wages. In the new system the government pays a monthly contribution to private fund managers under NPS, in addition to regular pension to the old cohorts. The burden on the exchequer has increased rather than decreased. Only the NPS designers know how wise the decision was to carry two burdens at a time under the guise of reducing the burden on the state exchequer. Now as all the old cohorts whose mouths were shut by not including them in the NPS by the then BJP Government are retiring and obtaining the benefits of OPS, and the new entrants under NPS nearing retirements start demanding equity, a time bomb is ticking which will have to be addressed by the current government. Can it do so?
(The writer is former International Senior Advisor, United Nations Development Programme)