A best of both worlds formula

Unified Pension Scheme is not necessarily a retrograde step, as reform hawks believe

The Union government announced on Saturday that it will start another pension scheme along with the National Pension System (NPS) of 2004 vintage. The Unified Pension Scheme (UPS) — employees have a choice of moving to it or staying with NPS — is the result of a lot of politics on pensions in the last few years. Many Opposition-led state governments had announced a reversion to the Old Pension Scheme (OPS) and promised its nationwide implementation if they came to power at the Centre. The announcement itself is based on work done by a committee chaired by the finance secretary in the second Modi government, who is now the Cabinet secretary. In terms of what it offers the employees, UPS seems to be as good as OPS. They’re entitled to a minimum assured pension amount and can look forward to drawing half of their salary at superannuation with the provision of a family pension. It would not be wrong to assume that the move will generate political tailwinds for the BJP not just among government employees and their families but also job-seekers who hope to land government jobs.

Pension liabilities do not lend themselves to simplistic projections and they don’t have to be borne by a government which is making the policy

What about the fiscal implications of the change, though? Pension liabilities do not lend themselves to simplistic projections and they don’t have to be borne by a government which is making the policy. This asymmetry between present political rewards and future fiscal liabilities makes the political economy of pensions very complicated.

Having said this, it appears that the government is hoping to generate these payments by continuing to invest the NPS corpus (and that of its UPS avatar) into financial markets. It would be interesting to see whether experts or the government itself release comparisons of the fiscal outgo between the NPS and the UPS. The difference, as of now, seems to be that the government will act as a buffer of sorts between market returns on the NPS corpus and what is deemed to be a fair pension for employees. This calls for tapping the best of the talent in financial markets to do the job. Tasks like these will require lateral entry hiring with no strings attached.

When seen in its entirety, UPS is not necessarily a retrograde step as some reform hawks will tell us. If democracy has to retain its sanctity, reforms, no matter how important, must be geared towards respecting democratic sensibilities on board rather than riding roughshod over them.