National Pension Scheme: Kerala likely to change stand as Centre signals revision in Union Budget

The Union Budget 2024 has indicated the Centre’s plan regarding the National Pension Scheme (NPS). During her Budget speech, Finance Minister Nirmala Sitharaman revealed that the committee reviewing the pension system has made substantial progress.

"I am happy that the Staff Side of the National Council of the Joint Consultative Machinery for Central Government Employees has taken a constructive approach. A solution will be evolved which addresses the relevant issues while maintaining fiscal prudence to protect the common citizens," she said today, without giving a definitive timeline when the committee would make its submission.

Last year, the finance ministry established a committee, led by Finance Secretary TV Somanathan, to assess the pension scheme for government employees and propose necessary adjustments, considering the current framework and structure of the NPS.

It is noteworthy that several opposition-ruled states are reverting to the Old Pension Scheme, or are contemplating doing so, in response to demands from government employees and other pressure groups. Kerala is among these states.

Kerala’s stand and chance of reroute

Following the State Budget in February 2024, Kerala Finance Minister KN Balagopal noted that the state government plans to reassess the Contributory Pension Scheme implemented under the NPS. Balagopal expressed concerns about the insecurity caused by the NPS among government employees. The government's intention is to review the NPS and implement a revised scheme that will offer greater security to employees. "A revised scheme will be developed to introduce an 'assured' pension system," he said. He also mentioned that new schemes of a similar nature in other states will be examined, and appropriate measures will be taken for implementation in Kerala. (Detailed version of Kerala's context is available at: New pension scheme instead of Contributory Pension; study by 3-member panel)

In light of the Centre’s indications in the Union Budget 2024 regarding the NPS, it is possible that Kerala may reconsider its stance.

Old pension scheme vs. New pension scheme

Under the Old Pension Scheme, a government employee is entitled to a monthly pension upon retirement, typically amounting to half their last drawn salary.

In contrast, the New Pension Scheme requires employees to contribute a portion of their salaries to a pension fund, with the benefit being a one-time lump sum payment upon retirement.

The Old Pension Scheme was phased out in December 2003, and the New Pension Scheme came into effect on April 1, 2004.

The restoration of the Old Pension Scheme by some states may provide temporary relief to state governments’ cash flows but arguably postpones the problem to a future date, potentially leading to an unsustainable or unstable situation, as Chief Economic Advisor V Anantha Nageswaran noted in January 2023.

In August 2023, the central government stated that there were no plans to amend the current pension system. Minister of State for Finance Pankaj Chaudhary conveyed this information to Parliament in a written reply.

So far, Punjab, Rajasthan, Himachal Pradesh, and Jharkhand have reinstated the Old Pension Scheme, rejecting the new system.

With PTI inputs