OROP impact will taper off gradually if replaced with NPS pronto

The BJP-led NDA did a grave mistake in its first innings -- 1999 to 2004. It did the most sensible thing in respect of pension to civilians -- those joining government service on or after 1 January 2004 will have to become members of New Pension Scheme (NPS). That was a brilliant move in as much as the burgeoning pension burden of the government was staunched in one stroke at least prospectively in respect of new recruits.

 OROP impact will taper off gradually if replaced with NPS pronto

Ex-servicemen during protest for One Rank One Pension at Jantar Mantar in New Delhi on Saturday. PTI

For the old employees it is still defined benefit plan whereas for the new recruits it is defined contribution plan. Defined benefit is free lunch. Defined contribution posits 10 percent contribution by the employee with a matching contribution from the employer. The government thus has come to limit and cap its downside risks unlike in respect of old employees for whom its liability is open-ended and indeterminate. It was a brilliant move in that the old employees, who were organized into a strong union, predictably did not take up cudgels for the new recruits.

Indian Railways, which is the largest employer in the world, would be a major beneficiary of NPS when the deleterious impact of defined benefit pension tapers off with pre-2004 recruits retiring.

It is a tad curious that the government of the day then did not deem it necessary to rope in the armed forces personnel as well into the NPS. Intuitively the Indian armed forces employs as many as the Indian Railways does if not more, and bringing it under the NPS financial discipline would have achieved two purposes simultaneously -- reduce the future pension bill in respect of the new recruits besides preparing the ground for tough negotiations with the veterans on OROP.

For those not initiated with the subject, one rank one pension or OROP in its rudimentary form posits that two persons retiring from the same rank will get the same pension provided their duration of service was also the same. Thus a veteran colonel who hung his boots long ago will get the same pension as his colonel son who retired recently provided they put in the same number of years of service. Once granted to armed forces personnel, the civilian government employees can also be counted upon to make a clamor for OROP. The armed forces personnel say their case is different because often they do short term service and in any case retire much before the civilian counterparts do but if the rationale of OROP is conceded for armed forces, the government will be at its wits’ end arguing with the civilian counterparts on such nuanced grounds. Be that as it may.

NPS is regulated by the statutory regulator called Pension Fund Regulatory and Development Authority (PFRDA) which has worsted the employees’ provident fund trust, another government authority, this one for managing another retirement benefit, provident fund by earning superior returns for the employees.

Under NPS, fund managers from the private sector are entrusted with the job of managing the wealth of the employees. Ten percent of salary contributed both by the employer and employee each is handed over to the fund manager who invests in the various instruments. For government employees, the maximum they can opt to invest in equity, the riskiest of market investments, is 15 percent of their corpus whereas for other citizens who voluntarily subscribe to NPS, equity investments can be as high as 50 percent. On retirement, pension is paid out of the accumulation in an employee’s account though he has the option to take as much as 60 percent of his accumulation as a lump sum withdrawal on retirement.

The harried Modi government would do well to honour its commitments to the armed forces personnel with regard to OROP; otherwise it would be pilloried for taking them for granted and using them as vote bank. Over a period of time, the deleterious financial impact of OROP will taper off what with new recruits having to settle for NPS like their civilian counterparts. In other words, NPS could be the antidote for OROP at least insofar as government pension financial liability to new recruits is concerned.

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Updated Date: Aug 18, 2015 15:12:17 IST