It offers superior returns – the compound annual growth rate for NPS schemes is about 9.5%. The 10-year g-sec yield is about 7.2%. States act as facilitators to move their employees to NPS and are required to make a defined contribution. Once an employee’s NPS account is opened, the contract is only between the NPS trust – the registered owner of all the assets under the NPS architecture – and the subscriber.
The securities are bought by pension funds on behalf and in the name of the trustees. But the individual NPS subscriber remains the beneficial owner of the securities, assets and funds. Simply put, the employer is no longer in the picture.
States like Rajasthan, Chhattisgarh, Jharkhand and Punjab have reverted to the old pension scheme to provide assured returns. Their finances are stretched. Rajasthan’s pension bill rose about 15 times, taking away 28% of its own tax revenues in 2020-21, compared to 19% in 2004-05.
Employee strength between 2008-09 and 2018-19 surged by 70%. As states will find it tough to meet the future pensionary liabilities, it has triggered the demand for transfer of employees’ NPS deposits. But if states were to challenge the legal aspects, it would result in protracted litigation.
A pragmatic way is for states to cushion the NPS with a top-up in the contributions during the accumulation phase or the pension corpus at the time of exit. Already, GoI and 18 states have raised their contribution to NPS to 14% from 10%. Fund managers can easily diversify investment across asset classes and better the returns for state government employees with a bigger pool of funds.