Why Kerala’s contributory pension scheme was under review, and what a govt committee has said on retaining it
Context- A report from a Kerala government-constituted committee, to review the state’s contributory pension scheme, has been made public now after a Supreme Court verdict last Friday (November 3).
The three-member committee was formed in 2018 to examine the legal and financial consequences of revoking the contributory scheme, which was implemented in Kerala in 2013. The report was submitted to the government in April 2021 but was not made public until the court intervened. The government also formed a cabinet sub-committee a week ago to study the review report.
(Credits- The Economic Times)
First, what is the National Pension System?
- The contributory pension scheme or the NPS was introduced by the Union Government in 2004. Apart from the Central government employees, it covered employees in many states over the years. As per the NPS Trust, 39 states/ UT have implemented the NPS over the last two decades, mostly before 2010. Kerala introduced NPS in April 2013.
- Under it, a fund is created from the contributions of employees and employers during the course of employment. This was not the case in the earlier scheme, which promised a fixed amount of last drawn salary (50 per cent) as pension after retirement and was funded by the government via taxpayers.
- In the case of NPS, the employee purchases an annuity scheme at retirement, with the fund standing in her name and that annuity becoming the pension.
- When the scheme was introduced in 2004, the employee’s pension contribution was 10 per cent of the salary and allowances by the employee, and an equal contribution by the government. In effect, it was around 18 per cent of the gross salary.
- The individual age and duration of service played a role in deciding the amount of pension here. A key to a bountiful pension amount under NPS is a longer duration of service. In April 2019, the Central government raised its share in the contribution to 14 per cent, which raised the share to 21 per cent of gross salary for an individual level.
What is Kerala’s pension scenario?
- In cash-strapped Kerala, the rising pension liability has been putting pressure on the state’s total revenue receipts. A high life expectancy in the state after the retirement age, particularly in relation to the number of years of service an employee, is also an important factor. In Kerala, the retirement age of state employees was 56 previously.
- The state budget for fiscal 2023-24 said it is estimated to spend Rs 94,649 crore on committed expenditure, which is 70 per cent of its estimated revenue receipts. Committed expenditure of a state typically includes expenditure on payment of salaries, pensions, and interest.
- This comprises spending on salaries (30 per cent of revenue receipts), pension (21 per cent), and interest payments (19 per cent). Now, one-fifth of the number of employees in government service are those who entered the service after April 2013.
- They are therefore enrolled under the NPS, with the retirement age at 60. Only by the middle of 2040 would all those people joining the services before 2013 (and having statutory pensions) retire.
When was NPS introduced in Kerala?
- NPS was introduced in Kerala in 2013 by the Congress government. It entails payment of 10 per cent of the salary, including dearness allowance, to the NPS corpus of all employees who joined the service from April 2013 onwards.
- The contribution of the state to the scheme has not increased since then. But in 2018, the CPI(M) government appointed a three-member committee to review the NPS, as reviewing the scheme was a poll promise of the CPI(M)-led LDF before the Assembly elections of 2016.
- A committee was formed to review the system, but its report was never made public. Last week the Supreme Court, which acted upon a petition of CPI-affiliated trade union of govt employees Joint Council, asked the state to reveal the review report.
What the NPS review report says
- The review committee report has not advised revoking the pension scheme. It did not see an illegality in introducing the NPS. At the same time, there is no legal barrier to revoking the scheme.
- The report said that continuing the NPS would result in a reduction of pension outgo as a share of total revenue receipts of the state government from 2040.
- It also suggested that the contribution of the state government to the contributory pension scheme be raised from 10 per cent to 14 per cent and dearness allowance to 14 per cent – as already done by the Central Government and various states.
- It wanted death-cum-retirement gratuity to be allowed for employees who joined the contributory pension scheme.
Why the report is against revoking NPS
- The review committee wanted the matters of pension to be viewed from a long-term perspective. The continuation of the scheme would not result in a significant lowering of the pension outgo and would result in the reduction of pension outgo as a share of the state’s GDP only around 2040.
- As pension outgo comes down, its share in total revenue receipts would also fall and consequently, the revenue deficit would come down – making more resources available for capital spending or expenditure on health and other social services.
- Instead, if the government decides to revoke the NPS, the share of pension in total revenue receipts will continue at over 20 per cent in Kerala well beyond 2060, restricting spending at present.
Argument against NPS in Kerala
- Those who retired under the NPS have said they are getting paltry annuities. Given that the contributions under NPS are invested in various assets that can be chosen from, employee associations point out that the danger of the asset value of the investment falling drastically in case of a stock market crash is real.
- A few associations and individuals argued for 14 per cent contributions by the government, the death-cum-retirement guarantee and ex-gratia pension for the NPS subscribers.
Conclusion- Five states, including Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh have reintroduced a statutory pension scheme. Government employees in many states have been demanding a return to the old pension scheme. However, states need to account for long term development priorities before deciding with any option.
Syllabus- GS-3; Social Security
Source- Indian Express