The Pension Funds Regulation and Development Authority (PFRDA) said after a detailed legal review of the NPS provisions that employee deposits could not be transferred to the Treasury.
Rajasthan and Punjab demanded NPS deposits from employees, believing that after switching to the old pension system, the state would provide them with pensions.
“The legal framework does not allow the transfer of funds from employees 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 employee and government contributions, the person said.
The provisions do not allow 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 employee funds be transferred to the state government to facilitate this change.
The Chief Minister of Punjab has requested the Chief Secretary of State to seek legal advice for the transfer of employee funds to the state government. Although the cabinet-approved scheme has been notified, its implementation is not yet clear. Political parties have promised a return to the old pension system in states that go to the polls.
Chhattisgarh is expected to follow suit and demands to return to the old pension scheme are gaining ground in Madhya Pradesh and Himachal Pradesh.
Rajasthan has already applied for NPS funds and is in communication with the PFRDA on the matter.
The Center had launched a contribution-based pension scheme in 2003 because the pension liabilities of the defined benefit pension system were beginning to weigh heavily on the budget and risked becoming unsustainable.
Defined benefit pension schemes impose unlimited liability on governments, unlike defined contribution schemes such as the NPS, in which the state only makes a specific contribution to the workers’ pension corpus.
A committee of experts tasked with studying state governments’ pension commitments warned in 2003 of the financial risks of maintaining defined pension plans. State pension payments fell from 2.1% of total revenue in FY81 to 11% in 2001-02, placing a huge burden on finances. They were expected to reach 20% in FY21.
The NPS was made compulsory for all new recruits to the central state services except the armed forces from 1 January 2004. Subsequently, most states joined the NPS.
The old pension scheme is a defined benefit scheme under which retirees received 50% of their last salary as a monthly pension.
In addition, the pension was adjusted for inflation and periodic compensation commissions, and it was an unfunded pay-as-you-go scheme charged to the state budget.
The move to the NPS was seen as a significant reform and several pundits have warned against the populist move to revert to the old system.
A June 2022 study by the Reserve Bank of India, “State Finances: A risk Analysis,” had flagged the revival of the old pension scheme by some states.
