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Is NPS drifting towards Disaster?

State govts’ dilly dallying in contributing towards the pension accounts of their employees would lead to a mess

While there is no shortage of people who are eager to brand the New Pension System (NPS) a failure because savers are not choosing it as a medium for investment, far too little attention is being paid on how the pension part of the NPS is being run. After all, the primary purpose of the NPS was to overhaul the central and state governments' pension systems so that the governments would not create a future financial hole with their future pension liabilities.

Unfortunately, it appears that this part of the NPS is drifting towards disaster. It's becoming abundantly clear that the NPS could end up just dividing the government's financial hole into lots of little financial holes, one each for each government employee's pocket.

The original idea was that each government employee would have an individual pension account into which 10 per cent of his salary would go and the government would put a matching 10 per cent, thus ending the government's liability. This money was then invested by one of six pension fund managers in one of three schemes which offer different mix of equities and different types of bonds.

There is a big problem in the way that this is being implemented, which is basically that it is not being implemented. One, the money is not there in individual accounts of each government employee but is handled as a lump sum and is distributed among fund managers and put in one of the schemes in a default manner.

This was known for a while, but now comes far more alarming news. It seems that more than two-third of the states (including big ones such as Maharashtra and UP) are simply not paying up, neither their own share, nor the share that they are deducting from the employees. In effect, the much-vaunted 'defined contribution' system is still a 'defined benefit' system, or rather, a just-don't-pay-anything-till-it-can-be-avoided system. Luckily for the states, this problem can be ignored for a very long time because the first set of employees who will need to be paid out of the NPS won't be retiring till about 2035.

However, much before that, the problem will become too big for it to be solved in any manner that is fair and just for government employees. If you are one of those covered by this system, you should start asking some questions and demanding answers about your pension before it's too late.