Retirement solutions

The fiscal impact of the sixth pay commission could be worse than this. However, we are now reaping the benefits of an important structural reform that has taken place in shifting to the New Pension System (NPS). From roughly 2004 onwards, all new recruits in a large swathe of the central and state governments have been placed in a new defined contribution system. The government is pre-funding their pension. The full cost of their pension is predictable, locked in and budgeted for. Under the NPS every employee contributes 10 per cent of his salary and dearness allowance. A matching contribution is made by the government. The financial burden of government obligations for pensions revisions by the sixth pay commission will be limited to the older employees. By 2010, when the pay commission recommendations could come into force, there would be about one million employees who are in a new system in which pensions are no longer a huge financial burden on governments. Considering the financial constraints every government faces — and this government faces more than any other — this important fact will allow a greater scope for salary improvement than if their pension burden had to be borne by the government. Thus India is now reaping the first benefits of pension reform.

The benefits of adopting the new pension scheme will accrue not only to the Centre but also to the 16 states which have joined the NPS. The existing burden of pensions on state finances is already very high. Uttar Pradesh spent Rs 4143.3 crore in 2004-05 as pension payments. This constituted 75 per cent of its revenue deficit. Andhra Pradesh spent Rs 3071 crore. Maharashtra spent Rs 2731 crore, while West Bengal spent Rs 2914 crore. In terms of the net present value of future payments, the two states with the biggest problem on pensions are Maharashtra and West Bengal. All states taken together paid Rs 39,370 crore as pension payments. The burden of payments grew sharply in 1993 to 2003 at the rate of 23 per cent — faster than the rate of growth of total revenues, own revenues and total expenditures. Pension payments to state employees have been eating significantly into state developmental expenditure, which declined from 68 per cent to 54 per cent of total state expenditure in the last 20 years, as pension payments rose from 5 per cent to 9 per cent. When pension liabilities in Andhra Pradesh rose exponentially — from Rs 330 crore in 1990-91 to Rs 2321 crore in 2001-02 — it chose to join the new pension system. Himachal Pradesh issued orders for new recruits to be part of the NPS in March 2003 and Tamil Nadu in May 2003, even before the Central government did — in August 2003. Chhattisgarh joined in on November 1, 2004 and Jharkhand on December 1 that year. States like Manipur and Madhya Pradesh came on board on January 1, 2005, as did Assam on February 1, Gujarat and UP on April 1, Goa on August 5, Orissa on September 17, Uttaranchal on October 1, 2005. Maharashtra too joined that year. All other states — with the exception of West Bengal which has taken an explicit decision not to join up — are also considering joining the new scheme.

These states will now reap the benefits of having joined the new scheme. They already have significant number of employees who are in the new system. Rajasthan today has 37,000 new recruits of the state government, who are now members of the NPS. The Rajasthan government had announced it would join the the NPS of the Government of India on January 1, 2004. Maharashtra has about 24,000 new employees who are in the NPS and Tamil Nadu, 10,670 employees in the scheme. New entrants like Goa have 1,162 state government employees and a 100 school teachers in the NPS, while MP has 2108, Orissa 260, Gujarat 250 and Uttaranchal 500. It is estimated that there are over 500,000 employees of the central and state governments, as well as various autonomous bodies, which are already members of the NPS.

The Left, primarily for ideological reasons, has been trying to stall the proper regulation of the NPS, which will flow from the Pension Fund Regulatory and Development Authority (PFRDA) Bill, and the adoption of the NPS in places like West Bengal (which need it most). Not only will this mean that the new recruits of the NPS lose out on the full benefits and improved pensions under the new system, it will impose greater constraints on the pay commission when considering improvements in government salaries. In the best interests of government employees, it is to be hoped that the Left will not succeed.