States join queue for new pension, but Bill hangs

In the case of states, the NPS covers departments, local governments, including panchayati raj institutions and autonomous organisations such as schools and colleges. Each state has chosen a different cut-off date, often with retrospective effect, after which new recruits are placed into the NPS.

The NPS might already cover one million people and it is their pension that will be at stake as political parties bicker.

States that have joined the NPS include Andhra Pradesh, Assam, Chhattisgarh, Jharkhand, Kerala, Manipur, Orissa, Punjab, Rajasthan and Himachal Pradesh and Tamil Nadu (which issued orders even before the Central government).

This diverse range of states highlights the non-partisan character of pension reforms. Only West Bengal has taken an explicit decision not to join the new scheme.

The decision by states to join up is being taken in view of the mounting pension payments to state employees that’s eating into state developmental expenditure. This has declined from 68 per cent to 54 per cent of total state expenditure in the last twenty years, as pension payments have risen from 5 per cent to 9 per cent.

This sharp increase in pension expenditure has also led to a slow down in recruitment as states try to bring down their pension liablities. The pension bill of Centre and states has risen from 0.76 per cent of GDP in 1987-88 to 1.64 per cent of GDP in 2004-05.

If pension reform is scuttled, this fiscal challenge will continue to dog the country’s public finance. Many state governments have delayed pension payments, given the fiscal stress.

The NPS is a defined contribution system, where each employee holds a personal account maintained in a central database, regulated by a pensions regulator. The employee will have a choice between multiple investment styles and multiple competing fund managers.

Under the new scheme, the burden of pension payment from the government is defined as the payment made every month by the government into the individual’s personal pension account. Under the existing system, pension liabilities of the government were growing with rising life expectancy and number of employees retiring.

In the emerging fiscal crisis, it may not have been possible to pay these pensions. New recruits, therefore, find the NPS to be a more credible promise about their old age security. The system is being opposed by trade unions in the organised sector whose members are covered by the EPFO, who are in no way impacted by the new system.