Don’t privilege govt workers over others
Instead of reviewing the National Pension System, train government employees to understand finance, markets and how to plan for their retirements
On April 6, the Union government set up a committee to review the pension system for government employees to look into the issue of pensions under the National Pension System (NPS)… “and evolve an approach which addresses the needs of the employees while maintaining fiscal prudence and protecting common citizens.” The committee, with finance secretary TV Somanathan as chair, was formed due to a growing clamour by government employees to return to the privilege of a generous inflation-indexed defined benefit pension — something that other workers can never hope to get but is expected to fund.
India has been a global pioneer in moving from a defined benefit (workers get a percentage of their last drawn pay) to a defined contribution (where workers accumulate a retirement corpus and then draw an annuity from it) pension system for government employees. The hard reform initiated by the AB Vajpayee government in 2004 was not reversed by the Manmohan Singh government over the next decade. But as the retirement date for those who joined service in the early NPS cohort draws closer, the discomfort with a non-guaranteed benefit has begun to take root, even though they signed up for it as part of the terms of employment. The rebellion in some states is spreading to other states, and possibly among central government employees.
The main grouse against NPS is that it leaves workers underfunded compared to the Old Pension System (OPS). But the reason for this underfunding (if true) lies with the workers’ lobby, which causes corpus amounts to be smaller than they can be. The two great fears of India’s government employees are the private sector (and, even worse, foreign firms) and markets (stock markets in particular). This irrational fear seeped into the DNA of NPS with central and state government schemes (CG and SG, respectively) investing only through three public sector pension funds — SBI, LIC and UTI, and only in government bonds initially. A 15% allocation to equity of assets under the management of the CG and SG schemes was allowed only in 2018.
This fear tied the hands of the fund managers and impacted returns. Using NPS Trust data, the average annual 10-year returns for CG and SG are 9.05% and 9.04%, respectively. On the other hand, the 10-year average annual return on the equity scheme (Scheme E) that people who don’t belong to gilt-edged government services can invest in is 12.86%. With the caveat in mind that even the average citizen can only invest up to 75% in equity, almost four-percentage point difference in returns translates into a massive gap over a period of 20 and 30 years. For example, ₹1 lakh invested each year in the two routes will yield different results. The corpus values 20 years later are ₹51 lakh and ₹76 lakh for the government schemes and the equity option, respectively. Thirty years later, the difference is almost double, with the government schemes at ₹1.36 crore and the equity scheme at ₹2.63 crore.
While government worker unions fuelled the rhetoric against private and foreign firms, the underlying story of India changed. SBI Pension Funds Ltd has SBI Mutual Fund as one of its sponsors, with 37% of its equity held by the France-based AMUNDI Asset Management. Similarly, UTI Retirement Solutions Pvt Ltd has UTI Mutual Fund as one of its sponsors, with a 23% stake sold to US-based T Rowe Price Group. Not just private but foreign firms are partial sponsors of the retirement funds of risk-averse government employees.
There are several fundamental problems with the pension story. One, the behaviour of the government workers suggests that they should be treated differently from other citizens. Why should a certain class of people, who not only benefit from fully funded health care for self and spouse post-retirement, continue to enjoy many privileges?
Two, it is problematic to suggest that ordinary citizens must look after their retirement needs and fund pampered government employees. Moreover, the mess in health care, education and many other government-run services indicate that not everyone in the cadre is efficient, honest or outcome driven. They don’t deserve special treatment.
What road could the Somanathan committee take? Definitely not the one that hawks the so-called Andhra model, which is still a defined benefit scheme with some lipstick on. The other suggestion of inflation-indexed bonds is good, but it will need the Reserve Bank of India to do its bit to develop the bond markets much more. Until then, it remains a project that is still far away from real life. I can only see one way forward — begin basic financial education that includes lessons on markets, the many faces of risk and real returns in schools and colleges. Put all State employees in mandatory training to understand basic finance, markets and how to plan for their retirements.
We only need to look at the imploding finances of countries such as France and soon, the United States, to gaze into our own future. Given our population size and the hard bargaining power that groups on the street have gathered, it is likely to be a highway to hell. Moreover, the propensity of the government to blink in the face of street power will likely force us on that highway simply because we, the taxpayers, have no power on the street.
Monika Halan is the author of the bestselling book Let’s Talk Money The views expressed are personal