Editorial: A return to the old pension system would be fiscally damaging

It is disturbing that there is a concerted effort on by some States to return to the old defined benefit pension scheme for government employees. While the AAP has already announced a switch-back to the old scheme in Punjab, the Congress has plans to implement it in Rajasthan and Chhattisgarh. Some other States are said to be contemplating a similar move.

Apart from the tricky modalities of clawing back past contributions from National Pension System (NPS), mobilising government employees to demand fixed pensions is a fiscally irresponsible move. It would saddle future taxpayers with massive pension liabilities. It is also retrograde for the employees themselves, who will have to make do with an inferior option to NPS.

In the old pension system, the government committed to paying a fixed pension to every employee at half the last-drawn pay. Under NPS, both the employee and the government make joint monthly contributions to the former’s retirement account during working years, with the corpus used to fund a pension, post-retirement.

The current clamour by government employees for the old scheme seems to be based on misconceptions about how the NPS works. The biggest fear about the NPS is that it redirects subscribers’ money into the ‘volatile’ stock market.

But, the fact is that NPS subscribers have complete freedom to allocate their savings to equities, corporate bonds or government securities, or any combination of the three. Risk-averse investors can simply allocate all their money to bonds or gilts in NPS, altogether skipping stocks.

Two, the biggest challenge for any retirement saver is to beat inflation. Equities do this job better than any other asset class. A 20-year analysis of Nifty50 shows that while it frequently delivered losses over one-year periods, stretching one’s holding period to 10 years reduced the loss probability to zero, while fetching a 11-12 per cent return.

While the EPFO has been struggling to declare an 8-8.5 per cent return from its ‘safe’ debt portfolio, NPS managers have earned a 13-14 per cent return on equities and 8.5-9 per cent on bonds and government securities over a decade.

Three, with NPS, an employee has greater control over his pension as he can save more or allocate more to equities. In the old pension scheme, the employee’s pension is mandatorily limited to half of his last-drawn pay.

The NDA’s decision in 2004, to transition government employees from the old defined benefit regime to the market-linked NPS was one of the most significant economic reforms. This shift freed up Central and State government finances from the burden of burgeoning pension payouts that eat into developmental expenditure.

It is unfortunate that attempts are being made to reverse this at a time when the finances of many States are in a perilous state.

While it may be futile to expect political parties to refrain from such competitive populism, the PFRDA can perhaps head off a crisis by launching a nation-wide awareness programme that highlights the many benefits of NPS to government employees.

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