A balance between welfare and feasibility may settle the NPS-OPS debate

Retirement from a job is an inevitability, unless, of course, one retires from life before reaching superannuation. Seen as a matter of justice, the human welfare approach would obligate employers to suitably support their employees and workers for their dedication, hard work and loyalty even after they are past their prime.

To be ideal employers, governments have to be not only good paymasters during the working lives of their employees but also major contributors to their welfare and pension after their retirement.

The Contributory Provident Fund (CPF) provided for the employee and employer to contribute equally to a fund which, together with interest earned, would be paid to employees on retirement in a lump sum.

As the scheme did not provide for a certain assured stream of revenue throughout the life of the employee, the central and state governments brought in the General Provident Fund (GPF)-cum-Family Pension (FP), now referred to as the Old Pension Scheme (OPS).

Employees would contribute to their provident fund, which the employers would invest and manage through a trust, and the employee would get on retirement the total of the contribution together with interest earned on the contribution.

Additionally, employees would be eligible to get up to 50% of the last pay drawn as a monthly pension for life.

The arrangement continued until the start of the new millennium, when the central government started re-examining the scheme from the point of view of economic or political expediency. The OPS was declared unsustainable and a burden on the public exchequer, and was discontinued in 2004.

All employees appointed thereafter, including those appointed before but who joined government autonomous institutions established after 2004, were forced to join the New Pension Scheme (NPS).

Eighteen years on, employees are now staring at retirement with meagre pensionary support under the NPS, and that too when the cost of living is rising rapidly.

By the end of November 2022, the NPS had as many as 23.43 lakh central government and 59.29 lakh state government employees. The clamour for the revival of the OPS has been growing.

The NPS does not offer the social security that the OPS offered. Returns on investment in the NPS are variable as they are subject to the vagaries of market risks. Why did the NPS go unopposed when it was introduced? Simply because it did not affect the existing employees and applied to those who would join in the future.

Sensing the hardship faced by retirees, Chhattisgarh and Rajasthan have reverted to the OPS. Andhra and Himachal Pradesh, too, are committed to reinstating the OPS.

The Punjab government is working on a similar plan while the Samajwadi Party has promised to reinstate the OPS in its election campaigns (It reportedly earned a majority of postal votes cast by government workers).

Thus, demand for the OPS has not only been gaining traction but also getting support from many political parties. The central government, too, seems concerned. It has enhanced employers’ contributions from 10 to 14% in the NPS to jack up the Assets Under Management (AUM) to enhance the amount of pension on retirement.

Going by the prevailing market trends, even with this enhanced contribution, the pension could work out to be no more than 30% of their last pay drawn. This would occur if an employee commutes 40% of the fund accumulated at the time of retirement to obtain a PF-like benefit and transfers 60% to an annuity scheme.

Seen through the prisms of financial feasibility and economic expediency, the OPS seems a heavy burden on the public exchequer. Yet the employees, who have spent their entire productive lives giving their best to their employers, cannot be left in the lurch.

The State Bank of India (SBI) chief considers it populism akin to fiscal hara-kiri. The harsh statement emanates on account of its estimate that reverting to the OPS by all states would cost no less than Rs 31 trillion.

Could we strike a balance or find a middle ground between the welfare demand of employees and financial sustainability? A major problem with the OPS was that it was not supported by any annuity investment and was paid out of the current earnings.

A financially feasible solution acceptable to employees would require a two-fold strategy: one, employees could be required to contribute a minimum of 10% of their salary or as much as they want to obtain PF-like benefits; two, employers, in this case, the central and the state governments, could contribute to the NPS an annuity so modelled and modulated that the corpus would return a yield equivalent to 50% of the last pay drawn by the employees.

A back-of-envelope calculation indicates that going by the prevalent rate of increment, pay raises, promotion, an annuity contribution to the extent of 25% of the pay would suffice to provide a pension commensurate to 50% of the last pay drawn. The overall contribution would then be around 35%.

The NPS currently has a corpus of Rs 2.18 trillion and Rs 3.69 trillion on account of the central and state government employees, respectively. This may warrant the annuity contribution to be suitably fine-tuned.

The contribution should be modelled to ensure the same benefits as the OPS, thereby requiring the government to suitably vary its contributions keeping in view the portfolio return, financial market conditions and life expectancy of retiring employees.

An approach like this would eliminate the bulk of the burden on the public exchequer and, at the same time, guarantee the desired pension equivalent to what the OPS presently offers.

(Qamar is a Professor in the Faculty of Management Studies at Jamia Millia Islamia and a former Advisor to the Planning Commission of India. Siddiqui is a faculty at the Faculty of Management Studies, Jamia Millia Islamia)