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The shift to the old pension scheme (OPS), which is a defined benefit scheme, by some States will modestly improve their cash flows but remains a fiscally regressive step, according to ICRA.
In the last 12-18 months, Chhattisgarh, Himachal Pradesh, Jharkhand, Punjab, and Rajasthan informed the Government of India (GoI) about their decision to revert to the OPS from the National Pension System (NPS), which is a defined contribution scheme.
“In the short term, their cash-flow position will benefit to the extent of the NPS contribution that will cease, which was limited to about 2-4 per cent of their revenue expenditure during FY19-FY22. However, from a long-term fiscal health standpoint, the shift to the OPS regime is a regressive step,”the credit rating agency said.
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.Between 2004 and 2010, majority of the State governments joined NPS.
“Since then, these States were providing pensions to earlier employees based on OPS, while at the same time, making contributions for new employees under NPS, thus enlarging their total pension outlay,” ICRA said.
The pension amount under OPS is formula based and is linked to the last salary drawn by an employee, providing certainty to the latter but imposing a contractual obligation on the Government to provide a defined amount to the employee so long as he/she/dependent is alive.
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In NPS, the pension amount due to the employee is subject to variation in the returns of the scheme in which the funds are invested, while the State’s liability is limited to making the defined contribution.
ICRA analysed the pension expenditure of the aforesaid five States in the revised estimates (RE) for FY23, the budget estimates (BE) for FY24 and their contribution to the NPS account in recent years.
The trends are mixed, with only Chhattisgarh and Himachal Pradesh estimating a YoY decline in their pension outgo in FY23 RE and/or FY24 BE.
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