Not possible to transfer savings under NPS to states: Regulator

The pension regulator has conveyed to the state governments switching back to the old defined pension scheme that their claim on employees’ accumulated savings under the National Pension System (NPS) was not legally tenable.

The Pension Fund Regulatory & Development Authority (PFRDA) has after a detailed legal examination of the NPS provisions told states that employees’ deposits could not be transferred to the state exchequer.

Rajasthan and Punjab have demanded employees’ NPS deposits, reasoning that after switching to the old pension system, the state would provide them with pensions.

“The legal framework does not permit the transfer of employees’ funds to employers under the scheme,” said a person familiar with the development.
The NPS is structured with certain tax incentives and the accumulated corpus includes contributions from both employees and the government, the person said.


The provisions do not allow for such a transfer of funds to anyone, the person added.

This issue is again in the spotlight after the Punjab government announced a return to the old pension scheme and demanded that employees’ funds are transferred to the state government to facilitate this switch.

Punjab’s chief minister has asked the state’s chief secretary to seek a legal opinion for the transfer of employees’ funds to the state government. Though the scheme approved by the cabinet has been notified, there is no clarity yet on its implementation. Political parties have been promising a return to the old pension scheme in states going to polls.

Chhattisgarh is likely to follow suit and demands for return to the old pension scheme are gaining momentum in Madhya Pradesh and Himachal Pradesh.

Rajasthan has already made a demand for NPS funds and is in communication with the PFRDA on the issue.

The Centre had in 2003 launched a contribution-based pension scheme as retirement liabilities of the defined benefit pension system began to weigh heavily on the budget and risked becoming unsustainable.

Defined benefit pensions impose open-ended liability on the governments as opposed to defined contribution schemes such as NPS wherein the state only makes a specific contribution to the retirement corpus of workers.

An expert committee tasked to study the pension liabilities of the state governments had in 2003 warned about the financial risks of continuing with the defined pension schemes. Pension payments of the states rose from 2.1% of total revenue receipts in FY81 to 11% in 2001-02, imposing a huge burden on finance. They were projected to hit 20% in FY21.

The NPS was made mandatory for all new recruits to the central government services except the armed forces from January 1, 2004. Subsequently, most states joined the NPS.

The old pension scheme is a defined benefit scheme under which retirees received 50% of their last drawn salary as a monthly pension.

Moreover, the pension was adjusted in line with inflation and periodic pay commission awards, and it was an unfunded pay-as-you-go scheme expensed in the state budget.

The shift to the NPS was seen as a significant reform and several experts have cautioned against the populist move to revert to the old system.

A June 2022 Reserve Bank of India study, ‘State Finances: A risk Analysis’, had red-flagged the revival of the old pension scheme by some states.

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