Editorial. The NPS’ features can be improved to make it more attractive

The Committee appointed by the Centre last week under the chairmanship of the Union Finance Secretary T. V Somanathan to review the pension system of government employees has its task cut out. The Committee has been formed in the backdrop of moves by a few States to shift to the old assured pension system for government employees. The Committee’s remit to address the concerns of government employees while keeping in mind fiscal prudence is challenging indeed. The Committee has been tasked to look at the New Pension System (NPS) structure to see if changes are warranted to make it more attractive.

The NPS is superior to the old pension scheme both for employees and for the fisc. It has proved a good wealth creator for its subscribers with annual returns of 9-12 per cent over a decade. The government is already heavily burdened with non-discretionary expenditure towards interest payments, salaries and administrative expenses. Indexed pensions for government employees can significantly add to this bill, crowding out productive spending and welfare schemes for the wider population. Most governments globally have moved away from pay-as-you-go pension schemes because it hurts inter-generational equity, by saddling future workers with taxes to fund pensions for the retired. As India faces a demographic shift in favour of the elderly a decade hence, it is important that the pension issue is settled expeditiously.

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The Committee can consider three tweaks to the NPS design to make it more attractive even while retaining the contributory model. One, while private sector employees enjoy the flexibility to vary their NPS contributions between a minimum of ₹1,000 a year and any maximum amount, government employees are mandated to contribute 10 per cent of their pay every month. This can perhaps be reconsidered by making employee contributions optional even as the government continues its 14 per cent contribution to the scheme. Of course, the final corpus will be lower if the employee opts not to contribute. Two, an unattractive feature of the NPS is its requirement that the employee compulsorily use 40 per cent of maturity proceeds to buy an approved annuity plan. Annuity plans lock in hefty premiums for a lifetime and offer poor returns of 5-5.5 per cent which are also taxable. Doing away with the annuity rule can allow NPS subscribers to explore higher-return options such as the Senior Citizens Savings Scheme (SCSS) or mutual funds, for higher pension.

Three, if the lack of predictability on pension is the main complaint, the government can consider offering a fixed return scheme for NPS subscribers to park their money at maturity. The scheme can offer an inflation-plus fixed return. Should returns on this scheme’s portfolio fall short of the promise, the government — Centre or State — can be required to make up the shortfall. The caveat though is that the pension payout to the employee will be directly pegged to the accumulated balances in his NPS account.

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