States rushing in to line up for new pension plan but Centre sits on it

Faced with staggering pension payouts, Andhra Pradesh has become the latest state government seeking to bail out of the old system and join ...

Faced with staggering pension payouts, Andhra Pradesh has become the latest state government seeking to bail out of the old system and join a new one with limited liabilities.

It will soon be a part of the new civil servants’ Defined Contribution (DC) pension scheme.

To iron out the details, the Andhra Pradesh Finance Secretary T A Radha visited the Ministry of Finance in New Delhi on Thursday. The state’s finance Department officials have confirmed to The Sunday Express that an order will be issued next week to confirm that all new employees of the Andhra Government will be part of the new pension system.

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The State Assembly had given its go-ahead to the move last week. Ironically, this comes even though the Centre has been dragging its feet on putting certain key aspects of the new scheme in place.

But Andhra Pradesh could not wait. Pension liabilities have been rising steadily under the Defined Benefit (DB) scheme currently in place. In Andhra alone, these liabilities have risen from Rs 330 crore in 1990-91 to Rs 2321 crore in 2001-02.

	What the Scheme is, why they all want it

			• What’s the existing govt pension scheme? It’s called DB (defined benefit), pay-as-you-go pension scheme in which pensioners get a given amount when they retire, the money comes from taxpayers. • What’s wrong with it? It’s just too costly. For all states, it rose from Rs 3,592 crore in 1990-91 to Rs 28,219 crore in 2001-02. As a proportion of state revenue, it rose from 7.9% to 17.2%. This led to a slowdown in recruitment as states tried to bring down their pension liabilities. • What’s the new scheme? It’s called DC (Defined Contribution) scheme. Under it, every employee contributes 10% of her salary and DA. Govt matches this. Employees get a basket of pension choices from competing fund managers. • Why does new scheme make economic sense? Under it, burden of pension payments is limited to the “matching” govt contribution. Under the old system, govt’s pension liabilities were growing with rising life expectancy and employees retiring. In the emerging fiscal crisis trap, it may not have been possible to pay these pensions.en.

This has made the Defined Contribution scheme more appealing. In fact, Himachal Pradesh in March 2003 and Tamil Nadu in May 2003 had already decided to join the new pension system. Their move came even before the Centre decided on a similar move in August last year. Other states have followed suit. Rajasthan government employees joined the new pension scheme from January 1, this year.

Karnataka, Maharashtra and Punjab have also announced their intention to join the scheme. Kerala and Goa have written to the Centre for more details.

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All other states, with the exception of West Bengal which has taken an explicit decision to skip the scheme are considering joining it.

The intention is to hook up with the civil servants’ pensions scheme of the Centre. Each employee will hold an individual account with a pension fund manager but it is maintained in a central data base regulated by a pensions’ regulator. The decision has been taken in view of the mounting pension payments to state employees. As a result, developmental expenditure has shrunk from 68 per cent to 54 per cent of the states’ total expenditure over the past 20 years. In contrast, pension payments have risen from 5 per cent of the expenditure to 9 percent. However, the Centre is moving too slowly. The Pensions’ Regulator Act has not been passed. Nor has the central record keeping agency been set up or pension funds chosen. This, despite the fact that the order was issued in August 2003, and new recruits since January are already part of the new scheme.