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FM Nirmala Sitharaman Interview: Moving to old pension scheme is unwise

FM Nirmala Sitharaman Interview: Moving from the New Pension Scheme (a defined contribution system) to the Old Pension Scheme (a defined benefit system) can bring more financial burden to states and the country. This, Finance Minister Nirmala Sitharaman said, can be trouble for future generations.

February 03, 2023 / 05:35 PM IST
Under NPS, employees have to make regular investments.

Under NPS, employees have to make regular investments.

Amid some states moving to old pension scheme, Finance Minister Nirmala Sitharaman cautioned against the move, saying that states might be paying the current generation of pensioners by loading it onto the future generations. The minister was speaking to Rahul Joshi, Group Editor, Network18 Group in an exclusive interview.

Recently, the Punjab government said it was considering reverting to the old pension scheme, or OPS, for its employees. If the proposal goes through, Punjab will be the third state to have reverted to the OPS after Rajasthan and Chhattisgarh.

Even Maharashtra Deputy Chief Minister Devendra Fadnavis recently said that the state was “not negative” about OPS.

“We should look at a reasonable balance and what we are leaving for generations to come. Yes, you need to borrow for the economy to run, but unless we have a complete understanding of the fiscal health of the state, for not just today but future decades, the rush to a conclusion may not be good,” she said.

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Even the Reserve Bank of India last month had warned against the OPS.

“A major risk looming large on the sub-national fiscal horizon is the likely reversion to the old pension scheme by some States. The annual saving in fiscal resources that this move entails is short-lived. By postponing the current expenses to the future, States risk the accumulation of unfunded pension liabilities in the coming years,” the central bank had said in its state finances report.

What is old pension scheme?

Old Pension Scheme, which was replaced by the New Pension Scheme, offers a monthly pension to government employees based on the last drawn salary. The NPS was implemented in 2004 by the BJP-led NDA government, but work had already started by the UPA government.

The formula for pension payout was fixed—50 percent of the last drawn basic pay plus dearness allowance at retirement or average emoluments earned in the last ten months of service, whichever is beneficial to employees. The employee should have completed at least ten years of service.

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As dearness allowance is linked to inflation, hence pension liabilities for the government keep on rising.

Notably, employees did not have to contribute towards pension under OPS.

What is National Pension System?

Under NPS, employees have to make regular investments. The funds are then invested in market-linked instruments. Further, 60 percent of the corpus on maturity is tax-free, while the remaining 40 percent is taxable and must be invested in annuities.

Under NPS, government employees contribute 10 percent of their basic salary towards creating their retirement corpus, with their employer contributions up to 14 percent to the kitty. Budget 2022 had allowed state government employees to claim tax break on their employers’ contribution to their National Pension System (NPS) of up to 14 percent of their basic salary and dearness allowance.

NPS is also open to private sector employees on a voluntary basis although some rules have been tweaked.

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They can choose to invest across multiple asset classes—equity, corporate debt, government securities and alternative assets—although the overall structure is more conservative compared to the framework for private employees.

While OPS was only available for government employees, all Indian citizens between 18 and 65 years can subscribe to NPS.

Moneycontrol PF Team