Pension regulator tells state governments their claim on employees’ savings is illegal

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Pension regulator tells state governments their claim on employees’ savings is illegal

The pension regulators told the state governments 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 been notified by a detailed legal examination of the NPS provisions, which states that employees' deposits could not be transferred to the state exchequer. After switching to the old pension system, the state would provide them with pensions, as a result of the demand for NPS deposits by Rajasthan and Punjab. A person familiar with the development said that the legal framework does not allow the transfer of employees' funds to employers. The NPS has certain tax incentives and the accumulated corpus includes contributions from both employees and the government, the person said. The provisions don't allow for a transfer of funds to anyone, the person added. This issue is in the spotlight after the Punjab government announced a return to the old pension scheme and demanded that employees' funds be transferred to the state government to facilitate the switch. Punjab's chief minister asked the state's chief secretary to seek a legal opinion on the transfer of employees' funds to the state government. There is no clear yet on its implementation, despite the fact that the scheme was approved by the cabinet. 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 launched a contribution-based pension scheme in 2003 after 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. In 2003, an expert committee tasked with the study of the pension liabilities of the state governments warned about the financial risks of continuing with defined pension schemes. Pension payments of the states increased from 2.1% of the total revenue receipts in FY 81 to 11% in 2001-02, imposing a huge burden on finance. They were projected to hit 20% in FY 21. The NPS was made mandatory for all new recruits to the central government services except the armed forces from January 1, 2004. The old pension scheme is a defined benefit scheme under which retirees receive 50% of their last drawn salary as a monthly pension. The pension was adjusted in line with inflation and periodic pay commission awards, and it was an unfunded pay-as-you-go scheme that was expensed in the state budget. The NPS was seen as a significant reform and several experts cautioned against the populist move to revert to the old system. A study done by Reserve Bank of India in June 2022, titled 'State Finances: A Risk Analysis', had dragged the revival of the old pension scheme by some states.