Can minimum guaranteed scheme in NPS assure states to not go back to OPS?

Under OPS, there is no defined contribution from employees but there is assured pension. However, NPS has defined contribution but no assured returns in terms of some proportion to last drawn salary

Some Opposition-ruled states including Chhattisgarh, Jharkhand, Rajasthan, Punjab and Himachal Pradesh have replaced or are in the process of replacing the new pension system (NPS) with the old pension system (OPS) for their employees. Even BJP-Eknath Shinde coalition in Maharashtra is not averse to going back to OPS.

Under OPS, there is no defined contribution from employees but there is an assured pension. However, NPS has defined contribution but no assured returns in terms of some proportion to the last drawn salary.

The Pension Fund Regulatory and Development Authority (PFRDA) is going to fill the gap by implementing a minimum assured returns scheme (MARS), likely in the next financial year. The scheme is yet to be cleared by the PFRDA board.

Will MARS help arrest the tendency among states to go back to OPS?

Let us first see the likely contours of MARS. This scheme would have a floating rate, which would be reset every year.

There would be a lock-in period of ten years for the product and the guarantee would be benchmarked to the rate of return on ten-year government security.

Suppose the guarantee is fixed for five per cent today, it will be valid for one year and thereafter it will be reset either upwards or downwards.

The guarantee will be less than the ten-year government security. If the ten-year government paper gives 7.5 per cent interest rate, the guarantee could be five, keeping a difference of 2.5 per cent or so.

If the market performs better and the rate of return is over five per cent, it will be given to investors. If the market performs worse, the rate of return would not go less than five per cent and the fund manager will have to bear the difference.

For this purpose, PFRDA will come out with insolvency norms for fund managers in line with insurance companies since this is for the first time that MARS is coming out.

The scheme would have a ten-year lock-in period for subscribers. Also, ten years would be the maximum that the scheme would run for. This means that 10 years shall be the minimum, as well as maximum, tenor of investments under the scheme.

Only those investors who remain invested for 10 years will get a guaranteed return.

Gautam Bhardwaj, co-founder and director of pinBox Solutions, which helps design and build digital micro-pension systems in Asia, Africa and Latin American and the Caribbean (LAC) region, believes that MARS could prevail upon the states to not rush for OPS.

"I think, as citizens, we are very enamoured by guarantee. Guaranteed returns would be lower than NPS is otherwise giving. But I think it should ease the pressure on the states going back to OPS," he said.

For instance, he said, Rajasthan Chief Minister Ashok Gehlot had said he did not want to expose his government employees to the vagaries of the market. If there is assurance in return, I believe it should give some solace to the state governments in this regard, he added.

But he cautioned that MARS is not a magic wand. 

"You will have to engage with employees as well. So employees should know that whatever decision the government is taking out of political pressure may not be in their best interests. There should be engagement with them to familiarise them with the benefits of NPS, the benefits of remaining invested for 30-40 years," Bhardwaj said.

At one level MARS would give at least one less reason to the states to crib but simultaneously the Centre and PFRDA should mount more concerted efforts to engage with employees, state governments and unions directly to help them understand the importance of optimum returns. 

However, the issue arises that in OPS employees get a certain percentage, usually half, of their last drawn basic salary. There is no such guarantee in even MARS.

Experts said if the state governments have an abundance of fiscal resources, there would be no problem with OPS.

But if some states are constrained to honour their commitment to salaries and pensions even today, how does one know the commitments would be honoured, say 20 years later?

"I would rather know I will surely get so much at the time of my retirement because it is my money, nobody can take it. That seems to be a much better deal than depending on the fiscal capabilities of future state governments. Various sections including teachers don't get salaries in some states even today," an expert said.

Meanwhile, there are reports that the finance ministry is attracted towards Andhra's guaranteed pension scheme model. However, the finance ministry sources denied that they are mulling implementing the model.

Under this model, called a guaranteed pension scheme, employees can get a guaranteed pension of 33 per cent of their last drawn salary if they contribute 10 per cent of their basic salary every month which is matched by a 10 per cent contribution by the state government. The guarantee can rise to 40 per cent of the last drawn salary if the contribution of employees and the government goes up to 14 per cent each.

Bhardwaj did not think that the Andra model was a sensible idea.

"I don't think that is a tenable proposition. Somebody has to underwrite that guarantee. Currently, PFRDA is the cleanest way of giving a guarantee, depending on market returns which will fluctuate year on year," he said.