Reverting to old pension scheme poses big financial risk, RBI warns States
January 17, 2023
Calling it a big financial risk, the Reserve Bank of India has advised States against the likely reversion to old pension system (OPS).
In its latest report titled ‘State Finances: A Study of Budgets of 2022-23’, the central bank reversion to OPS by some States poses a major risk on the “subnational fiscal horizon” and would result in accumulation of unfunded liabilities in the coming years for them.
Among the States, Himachal Pradesh, Rajasthan, Chhattisgarh, Jharkhand and Punjab have so far restored the Dearness Allowance (DA) linked OPS for their employees.
The OPS was discontinued by the Atal Bihari Vajpayee government in 2003 and introduced the National Pension System (NPS) from April 1, 2004. However, the Armed Forces was excluded from the new pension scheme.
The NPS is a participatory scheme, where employees contribute to pension corpus from their salaries, with matching contribution from the government, and is market-linked.
Why is RBI cautioning States against OPS?
“A major risk looming large on the subnational fiscal horizon is the likely reversion to the old pension scheme by some states. The annual saving in fiscal resources that this move entails is short-lived,” the RBI report said.
By postponing the current expenses to the future, the report said States risk the accumulation of unfunded pension liabilities in the coming years.
Under the OPS, employees get a defined pension. Under this, an employee is entitled for a 50% amount of the last drawn salary as pension.
However, the pension amount is contributory under the National Pension System, which is in effect from 2004.
Several economists too have expressed concern over reverting to the OPS saying it would put stress on States’ finances.
Former Deputy Chairman of the erstwhile Planning Commission Montek Singh Ahluwalia recently spoke against bringing back the OPS, saying it is one of the biggest revadis.
For 2022-23, the RBI report said States have budgeted an increase in revenue spending, mainly led by non-developmental expenditure such as pension and administrative services.
Budget allocations towards medical and public health and natural calamities have been lowered, while housing outlay has been increased.
Committed expenditure, comprising interest payments, administrative services and pension, is expected to increase marginally from 2021-22 (RE), the report said.