More than 300,000 employees recruited after the new pension scheme (NPS) was started in 2004 might not have enough money in their pension fund at retirement due to the government’s inability to firm up the rules of the game on time, the seventh pay commission submitted this week to the government has warned.
The commission has asked the Centre to set up an expert body to re-examine if the government needed to make a course correction vis-a-vis the government’s contribution. The suggestion came in response to several presentations that forecast that there would not be enough money for “reasonable post-retirement financial security” unless the government raised its contribution.
The Centre and many state governments had switched to the new pension scheme (NPS) from January 1, 2004 that required employees to contribute 10% of their monthly salary towards their pension with a matching contribution from the government. Some states, except West Bengal and Tripura, joined later.
This money was to be invested in a mix of financial instruments, ranging from the safe but low-yield government securities to the risky, but high-yield equity markets.
When they retire, their pension payouts would depend on the money accumulated in their pension funds. But this was the theory.
In practice, many government employees complained to the panel that detailed instructions were issued only in late 2009 and restrictions placed on them from investing in the equity market.
Besides, there were states that hadn’t kept their side of the bargain and were yet to make their matching contribution. The net result was that contributions for the period 2004-2012 have not been made in full, earned simple interest and did not get any market-linked returns.
“This has led to a situation where the accumulated corpus even after 11 years of service could be meagre. It is necessary that this situation which arose during the transition from OPS (old pension scheme) to NPS be addressed,” the panel headed by retired Supreme Court judge Justice AK Mathur said.
“The entire premise of the NPS was that people would invest heavily in stocks in the early part of their career and switch to safer instruments as they grow old. It is well established that the NPS would not offer adequate financial security unless you invest a major chunk in stocks,” a young 2006 batch IAS officer told HT, worried how he would secure his future.
“A carefully selected asset mix is the sine qua non to higher returns,” the panel report said, asking the government to calibrate the investment choices on a life cycle approach.
Not enough cover
The Centre shifted to the new pension scheme (NPS) from January 1, 2004
All state governments except West Bengal and Tripura gradually adopted the NPS
Under NPS, 10% of the employee’s salary is deducted as contribution to NPS. The government contributes the same amount
The contributions were to be invested in a mix of government equity securities
However, detailed rules on NPS were issued as late as 2009, which meant many state govts did not make matching contributions
Also, the employees lost out interest that they would have earned if the money was suitably invested
Seventh pay commission has thus asked the Centre to set up a panel to make course corrections.