Why Kejriwal's promise to bring back Old Pension Scheme a 'revadi' dangerous for Gujarat?

New Delhi, Nov 28: Delhi Chief Minister Arvind Kejriwal has promised the Gujarat voters of implementing the old pension scheme if his party is voted to power in the upcoming polls which is scheduled to be held in the state on December 1 and 5.

"By January 31, we will issue a notification for implementing the old pension scheme in Gujarat. I am not just talking. In Punjab, we have issued the notification," PTI quoted him as saying on Sunday.

The AAP convener said that other contractual employees, policemen, state transport workers, village computer entrepreneurs, anganwadi workers, teachers, health workers, talatis, sanitation workers have different issues related to grade pay, permanent job, increase of wages and transfer posting. "I assure them that we will resolve their issues. I request them all with folded hands that for a party to win an election, the support of government employees is important. I would appeal to them to give every single vote to the AAP in postal ballot and canvass for the party during the next three-four days," he said.

Bhagwant Mann-government in Punjab has announced that it is reinstating the old pension scheme although it is yet to come into effect.

On the other hand, the Gujarat government had introduced a new contributory pension scheme (NPS) for employees joining the service on or after April 1, 2005.

What is Old Pension Scheme?
The Old Pension Scheme was scrapped by the Union Government in 2004 and it was replaced with the New Pension Scheme. Under the old scheme, government employees used to get a fixed monthly income post retirement. The pension was paid based on their last drawn salary.

A fixed 50 per cent of last drawn salary along with dearness allowance at retirement or average emoluments earned in the last ten months of service were paid to the government employees after their retirement. One advantage was that dearness allowance was linked to inflation and that increases very often and that usually was revised twice a year.

The family members used to get pension even after deceased pensioner. In addition to it, the payout did not have any reduction.

The old scheme allowed the employees to contribute for the General Provident Fund (GPF) and the accumulated amount was paid at the end of their tenure with a good interest rates which are revised periodically according to the government's issued notifications. It has to be noted that this scheme was meant only for the government employees.

The income under the old pension scheme did not attract tax.

All in all, the government employees believe that the old pension scheme gave security to them and their families once their career ends and even after their death. So, there has been growing demand for the restoration of the scheme.

Benefits of New Pension Scheme
As the pension burden on the government was increasing to unimaginable level, the Centre rolled out the new scheme in 2004 and made come changes to the scheme in 2018 in order to make it more attractive.

According to the government, National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India.

Under NPS, individual savings are pooled in to a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in to the diversified portfolios comprising of Government Bonds, Bills, Corporate Debentures and Shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.

​At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a PFRDA empaneled Life Insurance Company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so.

The government will make a matching contribution of 10 per cent of the basic pay, plus dearness allowance contributed by the employees in the NPS fund. Under the Centre's scheme, the government will contribute 14 per cent against an employee's contribution of 10 per cent of his/her salary and DA with effect from April 1, 2019.

At the end of the employees' tenure, they can withdraw 60% of the corpus (tax free) and the remaining 40% is invested in annuities. Notably, this scheme can be availed by employees working in private sectors too.

The reason why this did not appeal to the government employees was because it did not guarantee a fixed amount as pension as it is market linked programme. Notably, the government employees will not get the benefits of GPF scheme.

What Experts Say?
Former deputy chairman of the erstwhile Planning Commission Montek Singh Ahluwalia had recently said that restoring the old pension is scheme will be one of the biggest 'revadis'.

"I think what the Prime Minister rightly called the revadis (freebies) of the world. There are many more revadis than we thought. I mean bringing back the old pension scheme is one of the biggest revadis that are now being invented," Good Returns quoted him as saying at an event.

According to a study done by SBI, the old pension scheme is not good for the state's financial health. "If we assume that all states migrate to the old scheme, and assuming an entry-level age of 28 years, with a 5% inflation indexation, the current present value of the implicit pension liabilities is around 13% of GDP, discounted by the current G-sec yield on 40 years. This is the implicit pension debt that will be unfunded as per the PAYG scheme", the study pointed out.

Despite experts stating that the OPS was not feasible, many non-ruled BJP states have gone back to the old scheme.

"The shift was necessitated by the growing pension liabilities of various governments. OPS was simply not feasible for the exchequer and it would be ruinous to go back to implementing it again," says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

Although the Old Pension Scheme undoubtedly remains the best choice from an individual's perspective, it is unsustainable and will have impact on the financial health of the country in the long run.