Is NPS drifting towards disaster? | india | Hindustan Times
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Is NPS drifting towards disaster?

While there’s no shortage of people who are eager to brand the New Pension System a failure because savers are not choosing it as a medium for investment, far too little attention is being paid to how the pension part of the NPS is being run.

india Updated: Oct 31, 2010 22:01 IST

While there’s no shortage of people who are eager to brand the New Pension System (NPS) a failure because savers are not choosing it as a medium for investment, far too little attention is being paid to how the pension part of the NPS is being run.

After all, the primary purpose of the NPS was to overhaul the central and state governments’ pension systems so that the governments would not create a future financial hole with their future pension liabilities. Unfortunately, it appears that this part of the NPS is drifting towards disaster.

It’s becoming abundantly clear that the NPS could end up just dividing the government’s financial hole into lots of little financial holes, ne each for each government employee’s pocket.

The original idea was that the governments would just contribute money to each employee’s account. The original idea was that each government employee would have an individual pension account into which 10% of his salary would go and the government would put a matching 10%, thus ending the government’s liability.

This money was then invested by one of six pension fund managers in one of three schemes which offer different mix of equities and different types of bonds.

There is a big problem is the way that this is being implemented, which is that basically, it is not being implemented. One, it seems that a bulk of the money is in a single lump sum and the original idea of each employee having a distinct account has just not been done.

The money is not there in individual accounts of each government employee but is handled as a lump sum and is distributed among fund managers and put in one of the schemes in a default manner.

This was known for a while, but now comes far more alarming news. It seems that more than two thirds of the states are simply not paying up.

In effect, the much-vaunted ‘defined contribution’ system is still a ‘defined benefit’ system. Or rather, a just-don’t-pay-anything-till-it-can-be-avoided system.

Luckily for the states, this problem can be ignored for a very long time because the first employees who will need to be paid out of the NPS won’t be retiring till about 2035.

However, much before that, the problem will become too big for it to be solved in any manner that is fair and just for government employees.