Reverting to Old Pension Scheme can cause major risks for the States, warns RBI.

The Reserve Bank of India, in its latest report titled ‘State Finances: A Study of Budgets of 2022-23’, stated that States who are reverting back to the old pension scheme may end up in a major risk on the “subnational fiscal horizon”.

It stated that by postponing the current expenses to the future, States risk the accumulation of unfunded pension liabilities in the coming years.

“A major risk looming large on the sub-national fiscal horizon is the likely reversion to the old pension scheme by some states. The annual saving in fiscal resources that this move entails is short-lived. By postponing the current expenses to the future, states risk the accumulation of unfunded pension liabilities in the coming years,” RBI said in its report.

The warning comes in the midst of a political brawl as some states Himachal Pradesh, Rajasthan, Chhattisgarh, Jharkhand and Punjab have reverted to the old pension schemes.

The OPS was discontinued by the Atal Bihari Vajpayee government back in 2003 and the National Pension System (NPS) was introduced from April 1, 2004. However, the Armed Forces were excluded from the new pension scheme.

Under the OPS, employees avail the defined benefit pension scheme or plan which is where an employee knows the pension amount of retirement benefit beforehand.  Under this, an employee is entitled for a 50% amount of the last drawn salary as pension.

But in the National Pension System, the pension scheme is contributory i. e., under which employees contribute 10 per cent of their salary (Basic + Dearness Allowance). The Government contributes 14 per cent towards the employees’ NPS accounts.

(With Inputs from The Hindu, The Indian Express)