New Pension Scheme (NPS)

Government of India had introduced the new pension scheme with effect from 1.1.2004 to all central govt employees who are appointed on or after 01.01.2004 except armed forces. The new pension scheme called contributory pension scheme has been introduced deviating from the existing system of Defined Pension to Govt employees. The existing Defined Pension scheme allowed the retiring Govt employees, the pension benefit from the date of retirement without making any contribution from his side, whereas the new pension scheme deviated from this concept and introduced the concept of contribution from employees with matching contribution from govt to earn pension.

The new pension scheme provides for contribution of 10% of their basic salary ( Basic pay + Dearness pay + Dearness allowance) by the employees which will be recovered from their salaries. The Govt will also be making equal contribution from its side and the scheme will continue till he attains the age of 60 years and the proceeds will be given to employees with the condition that 40% of the proceeds is to be invested in a pension plan to provide for pension for life time of the employee and his dependent/spouse. In case the employee leaves the scheme before 60 years , it is mandated that 80 % of proceeds has to invested in the pension plan.

The Government of India has formed the Pension Fund Regulatory and Development Authority (PFRDA) to monitor the functioning of the scheme and will be the apex regulatory authority for this purpose.

The intention behind the Govt for introduction of this scheme has been the pension budget is on the rise and with the implementation of new pay commission etc the pension liabilities has increased considerably and the money available with the Govt for developmental work is reduced and it has to meet all the social obligation with in the same budget. Further with large number of Govt employees joining the rolls, the money thus accumulated could to be diverted to financial system leveraging the country’s growth. Further various surveys also pointed out that the economic gains made would be substantial as the mobilization of assets would lead to effective investments in the stock, bond and mortgage markets, thus supplying the capital to finance corporate growth, government infrastructure and housing through market . This situation could lead to better infrastructure and corporate growth resulting in more employment generation. This money could also act as a buffer to prevent any volatility in the stock market by FII etc whenever they exist the market. The Govt felt since the stock market is now well regulated and laws are in place the time is ripe for introducing the pension reforms.

This new scheme was in contraversery from the day one and all the Govt employees associations, the trade unions and the left parties opposing the scheme as this scheme is against the welfare of the employees. They argue that the money thus collected is invested in the stock market the returns are not guaranteed and it is argued that the Harshad Mehta, Ketan Parekh episode bears testimony that stock markets are vulnerable to scams. The volatility in the market is not predictable and it may erode one’s hard earned wealth and it is at the mercy of market.

Though 17 State Govts have implemented this scheme in their states, the Left ruled states like Kerala, West Bengal, Tripura are still opposing this scheme and not implemented this scheme in their states. Due to opposition from left parties, the Pension Fund Regulatory And Development Authority Bill is still pending in the parliament and is not able to push the legislation in to law.

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