The accumulated corpus of a subscriber under the contributory National Pension System (NPS) can generate more than 50% of the last pay drawn as pension after a government service period of 30-33 years, Pension Fund Regulatory and Development Authority (PFRDA) chairman Deepak Mohanty said on Wednesday.
The remark comes when a government panel is reviewing NPS and exploring ways to make it more attractive in terms of risk-free pension payouts. The review is in the wake of many state governments reverting to the defined-benefit-based old pension scheme (OPS), and more announcing plans to follow suit.
“Certainly, with the full contribution (100%) invested in annuities or a similar product, NPS will generate (returns sufficient for providing) more than 50% of the last pay drawn as pension. Of course, the exact pension would vary depending on grade and promotion, and is subject to various assumptions and calculations,” Mohanty told FE.
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Mohanty is a member of the committee headed by finance secretary TV Somanathan to review the nearly two-decade-old NPS, with an intent to enable it to provide higher pensionary benefits.
However, the NPS corpus might not still be be enough if the pension monies were to be compared with the fiscally non-viable and non-contributory OPS for pre-2004 staff, who get annual increments in pension, linked to inflation. As the corpus remains fixed post-retirement, the initial higher pension gains will peter out if inflation-linked increments are to be factored in, an analyst said.
While ruling out reversing the pension reforms and going back to the fiscally-disastrous unfunded OPS, which entails up to 50% of the last pay drawn as pension from the Budget to the pre-2004 government staff, the Centre is conscious of increasing resonance of the demand for revival of OPS, ahead of the state assembly/general elections in 2023-2024.
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Under OPS, a government employee is entitled to 50% of his/her last salary as a pension if he/she has completed 33 years of uninterrupted service. Employees with uninterrupted service of more than 10 years and less than 33 years are entitled to pension on a pro-rata basis. Their pension is increased by 6-8% annually based on inflation.
According to the extant NPS norms, a maximum of 60% of the accumulated NPS corpus from contributions during a person’s working years is allowed to be withdrawn at the time of retirement. Such withdrawal is also tax-free. The subscriber has to invest a minimum of 40% of the corpus in annuities for a regular pension. However, it is not a guaranteed pension as returns are linked to markets.
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Declining to comment on deliberations of the NPS committee, Mohanty said: “Even some countries which have defined benefit plans, fund them via means like a payroll tax. Having a completely unfunded system has its own risk in terms of sustainability.”
“The terms of reference (of the committee) also suggest we also look at how we can do things differently for NPS, so that it becomes more beneficial to the pensioners.”
Seemingly keeping electoral gains in mind, many Opposition-ruled states — Rajasthan, Chhattisgarh, Jharkhand and Punjab — have announced a return to OPS. However, only two states stopped fresh contributions to NPS in FY23 for their staff after they reverted to the non-contributory OPS, indicating the moves are for political mileage as they also have lingering doubts about OPS sustainability.
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“OPS is an open-ended promise, and no one knows how much it will end up costing the country, given the imponderable of longevity of lives. There is also the inflationary linked pension revision which again, is difficult to estimate in advance,” said Kulin Patel, senior consultant at pinBox, a global social pensionTech. “To replicate OPS-style benefits, NPS is probably going to require 50% more or higher contribution rates than today.”
Andhra Pradesh has floated the idea of guaranteeing 33% of an employee’s last drawn salary if he/she contributes 10% and 40% if the contribution is 14%. However, no details of the scheme are yet available.
