Pension Scheme Dilemma: OPS is fiscally unstable while NPS needs more strengthening

OPS is unstable while NPS needs strengthening. The question is who will bell the cat and when?

The recent election results proved the futility of the roll-back of the pension reforms for government employees, in electoral politics. Congress lost both Rajasthan and Chhattisgarh, despite reintroducing the defined-benefit, pay commission-linked, old pension scheme (OPS). Prime Minister Narendra Modi’s BJP opposed the move and they won both states.

Ideally, that should create a consensus among political parties to avoid this suicidal path. Anticipatedly, AAP and, Congress may now soft pedal on implementing the election promise for OPS in Punjab and Karnataka, respectively.

But that may not be sufficient to seal the deal for the market-linked, defined-contribution-based National Pension System (NPS), introduced in 2004.

Not An Easy Task

The primary task is to take the four states – Rajasthan, Chhattisgarh, Jharkhand, and Himachal – which implemented OPS between 2022 and 2023, back to NPS. This is theoretically easy.

With NPS infrastructure in place and the legacy contributions locked with the central authorities; pension accounts can go live by a simple executive order. States can deposit the contributions for the paused period to the National Security Depository Limited (NSDL) to square up the accounts.

However, in practice, any such reversal wouldn’t be easy, mostly for political reasons.

Both Rajasthan and Chhattisgarh rolled back pension reforms at the beginning of the 2022-23 fiscal year. Over the last one and a half years, they expanded OPS benefits to lakhs of employees in quasi-government organisations like universities, corporations, boards etc.

In Rajasthan over 1400 employees who joined service after 2004 (when NPS came into effect) and retired after April 2022 (when the state exited NPS), were granted pension under OPS. Also, some post-2004 recruits, who retired between 2004 and 2022, had refunded the NPS benefits to avail of OPS.

It means the lobby for OPS is now much bigger than it was, in Rajasthan and Chhattisgarh. Naturally, return to market-linked reforms will face maximum resistance from both the states.

Jharkhand implemented the scheme in October 2022. Himachal did so early this year. So, they may face fewer problems in re-migrating to NPS. Punjab notified the return to OPS but did not notify the rules. Karnataka is yet to notify rollback of pension reforms. These two states are, therefore, saved from the destruction.

Read | RBI Bulletin: Shift to OPS by states would be ‘fiscally unsustainable’, big step back 

It is not clear, how the dice will roll. However, one can safely assume that it would be extremely courageous even for the new BJP governments in Rajasthan and Chhattisgarh to announce re-migration to NPS, on their own, ahead of the 2024 Lok Sabha election.

Reform Opportunity

Ideally, everyone should wait for a divine intervention from the Centre, which will have its own set of complications and opportunities, to clear the mess.

For the federal government, the task at hand is to ensure that such a circus is not repeated any time in the future. The precedence created by Congress and followed by AAP is dangerous for the fiscal reforms and may be revived with the change in government.

It is also necessary to force states like West Bengal and Tamil Nadu to undergo pension reforms. According to a recent RTI reply by the Pension Fund Regulatory and the Development Authority (PFRDA), both states notified NPS only for all India services.

Tamil Nadu was the first state to get out of OPS around 2003, during the Jaylalitha rule. In those days, NPS architecture was under construction and, states were allowed to keep the employees’ and employer’s contributions in personal deposit (PD) funds in the treasuries.

After the creation of due infrastructure, by the Manmohan Singh government, states transferred the funds to National Pension System Trust for investments in market-linked instruments.

Tamil Nadu avoided joining the Trust-operated investment activities. They used the pension funds to boost their cash flow.

Also Read: National Pension System: Not just a great retirement tool, it offers tax benefits too

According to the Comptroller and Auditor General (CAG), as of 2021-22, the funds retained by Tamil Nadu earned four to five percent interest from LIC and treasury bills. In comparison, professionally driven NPS earned an average of 9.5-10 percent.

The CAG held that Tamil Nadu had to pay 2.2 percent from its pocket to pay general provident fund comparable return (7.1 percent) to employees. To look at it from the state government's perspective, they enjoyed access to cash at rock bottom interest.

Employees are the ultimate losers as they will go home with lower returns than available through market investments. This is a blatant misuse of power by the state to cover up its poor finances.

West Bengal is the worst. The Marxist government of the past denied front-ending pension expenditure and bringing accounts in order. Leftist employee associations were happy to get OPS. The state kept delaying the release of dearness allowances to restrict running expenditures. Employees missed the best of either side.

The Mamata Banerjee government follows the same policy. To add, the state has almost stopped recruitment. The vacancies are filled by lowly paid contractual staff (who are bound to be more loyal to the party). Even the sensitive home department is full of them.

There are also anomalies in pension contributions. Many states, like Rajasthan, did not abide by the central formula for 14 percent contribution by the state and 10 percent by the employees. Media reports claim many states are irregular in depositing contributions to the NPS authorities.

Who Will Bell The Cat?

To cut the long story short, the NPS story is in a mess. While hapless state employees blame it on the ‘market’ for insufficient returns, which keeps the myth of OPS alive, the truth might be lying elsewhere.

The irresponsible act of Congress and other parties in the (now-belied) hope for votes, not only added to the mess but, also created an opportunity for a goods and services tax (GST) like reform to strengthen the decades-old fiscal and administrative reforms agenda.

OPS is no solution. It’s a threat to the nation's fiscal stability. But, NPS must be strengthened and should be made mandatory. The question is who will bell the cat and when?

Pratim Ranjan Bose is an independent columnist, researcher, and consultant. His X handle is @pratimbose. Views are personal and do not represent the stand of this publication.