Sustainability a critical issue in unfunded pension schemes like OPS, no uncertainty in NPS: PFRDA chairman

NPS is fully funded, so there is no uncertainty around sustainability

Some state governments including Rajasthan and Punjab have, in the last one year, decided to revert to the old pension scheme (OPS) for their employees.

This has led to demands from employees of several other state governments to follow suit and opt out of the National Pension System (NPS) to OPS.

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However, globally there is a shift towards fully-funded schemes such as NPS as sustainability is a question mark in case of unfunded pension schemes, Pension Fund Regulatory and Development Authority (PFRDA) chairman Deepak Mohanty told Moneycontrol in an exclusive interview.

“These are two different structures. In the case of unfunded pension schemes, there is always the question of sustainability. In the case of NPS, the essential point is that it’s fully funded. There is no uncertainty in that sense,” he said.

Market-linked returns

However, taking into consideration certain state governments’ wishes to opt out of NPS, the finance ministry has set up a committee to review NPS for government sector employees. “One of the terms of reference is to see how NPS can be further improved for the government employees,” he said.

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On being asked why government employees should prefer NPS, given that they find comfort in guaranteed returns, Mohanty pointed to NPS’ returns since inception. “NPS returns are market-linked. Lack of assured returns might be a concern, but if you can ride the market cycle with all the fluctuations…you have the staying power, it is more or less like an assured return scheme,” he said.

NPS was introduced for government employees from January 1, 2004. OPS option is not offered to employees who have joined the government sector after this date. NPS’ returns for the central government as well as state government schemes make it a compelling proposition, according to the PFRDA chief.

“Since inception, the returns are quite good. For instance, the central government scheme in NPS is yielding 9.5 percent annual returns, while state government scheme has provided returns of 9.4 percent since inception,” he said.

The financials

As on May 27, 2023, assets under management in case of the central government scheme stand at Rs 2.72 lakh crore, while state government scheme’s AUM crossed the Rs 4.75 lakh crore-mark.

In terms of net contribution, the central government scheme logged net inflows worth Rs 1.78 lakh crore, a growth of 20 percent over the year ago period. State government scheme saw faster growth of 21.58 percent to touch Rs 3.53 lakh crore as on May 27, 2023.

To be sure, these are not voluntary contributions from central or state government employees, but automatically flow into NPS’ plans.