Pension Scheme - Future of Retired Employees

The old pension scheme, introduced in the 1950s, was exclusive for government workers. It guarantees a pension equivalent to 50 per cent of the last drawn basic salary on monthly basis, along with a Dearness Relief's with half yearly revision upon retirement or an average of the wages earned in the former ten months, whichever is more favourable. In the Old Pension Scheme there is no provision of employee contribution. The old pension scheme guarantees return certainty by calculating the monthly pension based on the last salary received by the employees. As in now, the government covers the full cost of the pension as its non-contributory, indexed, defined benefit pension. It also includes a General Provident Fund (GPF), to which every government employee contributes equivalent to 10% of its basic pay. The employee receives the total amount accumulated over the course of their employment when they retire along with interest which government declares each year.

However, after noticing blotches in the system, the Union Government discontinued the scheme with effect from January 2004, and the centre, along with all states, shifted to the NPS scheme (now called the New Pension Scheme). A report from the Old Age Social and Income Security (OASIS) project, commissioned by the Ministry of Social Justice and Empowerment (MSJE) in 1998, is credited as the germination point of NPS. Pensions are paid for by the government from the consolidated funds of India and there is no pension-specific corpus is available for payments. As a result, pensions are paid through taxes collected from the current working class. The OASIS project report has considered it and reported this issue.

Few Advantaged

According to the 1991 Census, about 314 million people working in India. Among the working population, 47 million (15.2%) are employed, more than 166 million (53%) are self-employed, and 97 million (31%) are temporary or contract workers. About 11.13 million (23%) of salaried employees working in Central, State, and UT governments and departments (including post, telegraph, the armed forces, and railways) were eligible for the existing Old Pension Scheme.

Around 11.13 million i.e. 23% of salaried employees are employed by the Central, State, and UT governments and departments (including post and telegraph, the armed forces, and railways) and are eligible for OPS, roughly 49% (23.18 million) of salaried (non-government) workers were covered under Employee Provident Fund (EPF) and the Employee Pension Scheme and 28% (13 million) of the salaried workforce and roughly 268 million workers in the unorganised sector (including farmers, shopkeepers, professionals, cab drivers etc. were also not covered in any existing provisions.

As a result, only 34 million (or lower than 11%) of India's estimated working population were eligible to share and participate in formal provision designed to deliver old-age income security.

Population Rsing

According to the report, India's elderly population has been steadily increasing since 1961. Between the year from 2001 and 2011, more than 27 million people were over the age of 60. Demographic projections also suggested that the number of the aged will rise even more rapidly to 179 million by 2026.

According to the data released by the Department of Expenditure, Ministry of Finance, there were 5.2 million central government employees (includes employees in railways, defence services, posts and telecommunications) as on 31st March 1998 and at the same time the total number of central government pensioners was 3.54 million reflecting a dependency ratio of around 66%.

Rise in Life Expectancy Rate

The term "life expectancy" refers to how many years a person can expect to live further. Life expectancy has been defined as an estimate of the average age at which members of a specific population group will die.

India's life expectancy was 35.21 years in 1950 which is presently 70.19 years in 2022 and its is further expected to improve at 81.96 years in 2100. The statistics are certainly positive. This indicate that the country's prosperity is increasing and more people are realizing the benefits of a healthy lifestyle choices and exercise. There are many vulnerable people aged 60 or older. Given the government's financial situation and the size of the population, there is no easy solution to providing them with a guaranteed income.

Unfunded, impermanent and unsustainable Pension Liability

The government's old pension scheme appears unsustainable. First, Pension liability is increasing every six months due to an increase in benefit costs i.e. increase of dearness relief and Second, life expectancy is increasing due to improvements in medical facilities. Over the last three decades, pension obligations for the Centre and states have jumped manifold.

Finance Secretary T.V. Somanathan stated, states reverting to old pension schemes should be cautious as it could have implications for future governments, while underlining the need to keep the pace of increase in revenue expenditure for making interest payments and paying pension and subsidies lower than the nominal growth rate of the economy. It is a significant issue, which if not appropriately addressed, can very unfavourably affect the finances of states that are making the changes. It is one of the cases where you are appearing to save money here and now while creating huge problems for future generations and future governments. The galloping pension bill of states and central government employees as per the data published are:

Rs. In crores

In 1990-91, the Centre's pension payment was Rs 3,272 crore, and the expenditure for all states combined were Rs 3,131 crore. By 2020-21, the Centre's payment has increased 58 times to Rs 2,08,473 crore while for states, the payment has increased 125 times to Rs 3,86,001 crore. Overall, pension payments by all states combined eat away a quarter of their own tax revenue. If State employee's wages and salaries were added to the bill, the states would receive virtually nothing in its own tax revenue. There is also a big issue of equality between generations. Today's taxpayers paying for the ever-increasing pensions of retirees, with Pay Commission awards almost taking the pension of old retirees to current levels, means the pension of someone who retired in 1995 may well be the same as that for someone who retires in 2025. This has led to a massive pension burden on the resources of the Union and state Governments.

According to the Comptroller and Auditor General of India (CAG) report, the union pension payment was 132% of its expenditure on salary and wages in 2019-20.

New Pension Scheme (NPS)

The NPS is a defined contributory and voluntary pension system that is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Initially NPS scheme was designed in 2004 as an alternative to pensions for government employees further it was voluntarily extended to all Indians including self-employed professionals and others in the unorganised sector in the year 2009. People who work for the government and participate in this national pension (NPS) pay 10% of their basic income into the national pension and employers contribute up to 10% of the total. As of the first of April in 2019, the employer contribution for NPS has been increased to 14 percent instead of 10 percent which was earlier equal to the worker's contribution.

According to the national pension (NPS) a retiree may take a lump payment from their pension fund. 60% of the redemption amount is tax-free, while the remaining 40% must be invested in annuities plan for a normal income or pension. NPS is a market-linked pension product that allows you to regularly invest a certain amount during your working life and receive a pension after retirement. Individual contributions to the national pension are pooled in a pension fund that invests in a diversified portfolio of government bonds, corporate debentures, and stocks. Professional Fund Managers (PFMs) regulated by PFRDA manage investments including SBI, LIC, and UTI. NPS has a two-tier structure of retirement accounts that offer tax benefits and are required for NPS registration and sub accounts that provide withdrawal flexibility. Tier-1 accounts are essential primary account that also serves as the pension account. Tier-2 accounts in NPS are linked to the Tier-1 accounts in NPS and are intended to be used as investment accounts. Depending on your investment objectives, anyone can invest in NPS exclusively in a Tier-1 account or in a combination of Tier-1 and Tier-2 accounts both.

World Bank on Pension Scheme

World Bank in its various report has also outlined that pension system should be fiscally and politically sustainable to achieve their income support objective. Unsustainable pension systems shouldn't be an obstacle to fiscal stability, economic-growth, poverty reduction and infra-structure development.

• Pension eligibility age: Normal pension eligibility age should depend on retirement age, however flexibility in retirement may be desirable. Benefits for early retirees should be adjusted to reflect the longer period for which they are paid.
• Adequacy: As per general principle, sufficient pension should be paid for from the pension fund pool. In defined benefit scheme, this is more complicated to achieve, however actuarial technique can be used to find out which combinations of parameters and rules are feasible.
• Indexation: Changes in living costs or living standards should be automatically adjusted and reflected in pension benefits. Indexation ensures adequacy in a dynamic sense, without which pension purchasing power of pension can decline quickly.
• Secure and efficient: Pensions are inflation protected, sustainable and affordable. Management is efficient and costs are as low as possible.

Ways ahead

Smt. Nirmala Sitharaman, Finance Minister, Government of India, announced in the parliament on 24.03.2023, to inter-alia, set up a committee under the Finance Secretary to study the national pension (NPS) issue and develop an approach to addresses the needs of the employees while maintaining fiscal prudence to protect the common citizens.

A report by State Bank of India (SBI), has cautioned reverting to old pension scheme by states will set off a fiscal time bomb. Such a move would have disastrous consequences as other states would follow suit, sparking a race to bottom. If all states migrated to the old scheme and assuming an entry level age of 28 years, with a 5% inflation indexation, the current present value of the implicit pension liabilities is around 13% of GDP, discounted by the current G-sec yield on 40 years. The reversion to the old pension scheme will be a big setback to years of reforms which started in the late 90s with the OIASIS report which provided the framework for shifting to a funded New Pension Scheme.

Pension Fund Regulatory and Development Authority Chairman, Sh. Deepak Mohanty, said the pension regulator was working on a pension scheme that could provide a minimum assured return. He further said that - we are considering an assured return product and we will come out with that product soon. However, you must see that the returns are attractive.

Former RBI Governor Sh. Raghuram Rajan has also expressed his concern over OPS and said that restarting the old pension scheme would be an enormous obligation in the long run. We need to find less costly ways to meet the needs of government pensioners, he said.

NPS scheme should offer minimum guaranteed fixed pension at 45%-50% of last drawn basic pay, without any market-linked uncertainty. Further, in order to account for inflation, the NPS should contain an inflation adjusted Dearness Relief (DR) like in old pension scheme. These changes in the NPS will protect the pensioner's salary at the date of retirement in real terms. The proposed NPS will justify the demand and fear of uncertainty among the employees and on the other hand it will not be burden on the government part as still NPS will be considered as contributory pension scheme as the contribution from the employees' side will be there unlike the old pension scheme. Further the eligibility requirement which has not been defined in the NPS should also be fixed like in old pension scheme which is typically 10-20 years of minimum term of employment. It is also necessary for promoting social welfare and inclusive growth, moreover the pension will do contribute towards the demand-led growth of the country. Therefore, a welfare country like India who is on that of development and growing with the pace of 7% annually should think of expanding coverage of guaranteed pension instead of decreasing the scope of pensions.