The recommendation of the Parliamentary Standing Committee on Finance to devise a mechanism to ensure a minimum assured return to subscribers of New Pension System (NPS) flies against the raison d'etreof the NPS, to reduce the burden of pension on government finances.

The entire rationale of the shift from the pre-NPS defined-benefit pension scheme (where pensioners are assured of a specified pension) to the defined-contribution NPS (where there is no such assurance) is to rein in the government's growing pension liabilities.

That will be defeated if the government gives an assured return, as the parliamentary panel has suggested. Yet the panel is right to point out that in the absence of a guarantee, the NPS cannot claim to provide old-age income security.

True, most countries have moved from defined-benefit to defined-contribution pensions. But there is usually some minimum social security either in the form of a Pillar I pension or some other form. In contrast, NPS subscribers in India have no such cushion.

So, the panel's suggestion that the minimum rate of return on NPS contributions should not be less than the interest rate on the employee provident fund scheme and any shortfall should be made good from the Budget, has merit. In practice, this should not be very difficult.

As long as the EPF rate is not way off-market, there is no reason why fund managers can't be asked to match it. After all, pension reform was never meant to be only about reducing the government's burden.

It was also meant to extend the coverage of a formal pension scheme to the vast majority outside the privileged class of government employees.

For them, the NPS opened a new option; especially when beginning early 2009, the scheme was opened to the non-government sector as well.

But if the scheme has found few takers to date, despite having close to 85% of the working population without any formal pension scheme, it is because it falls short on the single-most important criterion of any pension scheme, one that offers old-age security certainty.

Till then, the NPS will not find many takers, especially among those who need it most - the less well-to-do.

Courtesy by Economic Times on 5^th Sept, 2011

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S.S.Mahadevaiah
General Secretary
All India Postal Extra Departmental Employees Union