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By the standards of India’s government schemes, NPS or National Pension System is unusually progressive. It is a defined contribution system in which the pension is linked to how pension fund investments perform rather than the employee’s final salary. Since the vast majority of its subscribers are government servants, the Indian taxpayer is shielded from bearing the potentially unaffordable costs of government pensions. This stands in stark contrast to the previous system that gave pensions linked to salaries (called the Old Pension Scheme or OPS) and placed the burden of these pensions on the taxpayer. However a recent Cabinet decision is set to bring back the OPS – it says that the pension will be at least 50% of the final salary if the government servant opts to convert his/her entire accumulated corpus into an annuity (monthly pension). The NPS will continue, in name only.
What happened
The National Pension System in its current form, shifts the responsibility of saving for a pension from the employer to the employee. It allows the employee to select pension funds to invest in and build a retirement corpus over time. In return, employees are given a tax-break on contributions and tax-free returns until withdrawal. The system is very similar to the ubiquitous 401k account in the USA. The broad NPS structure is the same for government and private sector employees, but the government model stopped short of shifting full responsibility – equity investments were capped at 15% of the corpus and only public sector pension fund managers could manage the government employees’ pension corpus.
These safeguards, however, failed to protect NPS subscribers from the volatility that Indian debt and equity markets witnessed in recent times, partly due to higher than expected spending by the Indian government. The growing number of protests by government servants against poor NPS returns and the resultant low pensions, finally had its effect – the government caved in and brought back a link with the employee’s final salary. Along with this measure, the government also hiked its own contribution to the employee’s pension from 10 to 14% of salary and allowed employees to withdraw 60% of their corpus on maturity, rather than the 40% allowed previously.
What this means
First and foremost, the Indian taxpayer is back in the dock. He/she has to shoulder the government’s vast and unpredictable pension bill. This is likely to create problems for future governments and taxpayers as the population ages.
Second, the NPS is also open to private sector subscribers. The changes made in favour of government subscribers create a two-tier NPS, a first class one for government employees with assured pensions and a second class one for private sector workers with no guarantees. This is likely to face legal challenges given how directly it infringes on the right to equality guaranteed by Article 14 of the Constitution of India. Apart from the legality, there is a wider moral question – why should government employees be treated better than private sector workers for their pensions?
