Don’t mess with NPS

The government is reportedly planning to extend benefits of gratuity, family pension and death gratuity to the new pension system (NPS). A committee has been appointed to estimate the extent of liabilities this will create for the government. This move deserves to be nipped in the bud. Introducing features such as gratuity, death gratuity and family pension goes completely against the original objectives of the scheme and will effectively dilute the case for introducing NPS. Instead, the scheme needs to be strengthened by linking it with group insurance schemes and by carrying out reforms that would make capital markets more stable. The NPS was envisaged to be a defined contribution scheme wherein the benefit at the time of retirement was linked with the contributions made. This contrasts with the older system in which cumulative retirement benefit comprised of PF contributions and ‘non-contributory’ elements such as pension and gratuity. The main advantage of NPS is that it would free the government from huge pension liabilities for its staff.
The proposed new additions significantly dilute the original idea. It will create fresh liabilities for which successive governments will have to find resources. The design of the NPS has already been extensively debated and there is general agreement, except for a few sections, that this is the right way to go. Social security for government and other employees can be enhanced by encouraging employers and employees to opt for group insurance schemes — life, accident and disability. This will provide financial security to the employees and their families. Also, important in this context is the reform of the capital market. The NPS plan envisages investment in equity. However, the kind of volatility that has been witnessed over the past one month has the potential to scare would be subscribers away from plans with an equity component. Stable markets will, therefore, be important for the success of the NPS.


-- The Economic Times Editorial