Why Should Not Hybrid Type Contributory Pension?

The agitations from the part of employees from various Central government departments were not powerful when the government introduced Contributory Pension system in 2014. The reason was clear and as far as employees’ unions are concerned, at that time, the protest against NPS was actually a fighting for protecting the interest of employees who are not entered into service. Since the strength of aggrieved employees were very few compared to employees who are not covered under NPS just after its introduction, no one was much concerned about the pros and cons of this scheme.

In other words, we can say that it was a struggle between self-protection of majority and a mere need of minority. In that phase, the majority succeed and neglected the minority.
After 13 years, the scenario has changed a lot when the NPS Babies have been grown and attained considerable strength in number. The old majority will become minority in near future.  Now think of a situation described below.

If the government, in 2024 while celebrating the 20^th anniversary of implementation of contributory pension system, decide to spread the NPS facility to remaining employees who are supposed to enjoy the statutory pension benefits also and the government decide to give a lumpsum amount after calculating government contribution and appropriate percentage of interest as if the employee was in NPS system from the beginning of his career for investing it into an annuity of an insurance company for getting pension.

Whether NPS Babies have to fight against the government decision or not at that time?  Because most probably they will be the majority at that time.

We cannot blame them, if someone think that why should they give up their salary by conducting strikes for protecting the statutory pension of minority who had not fought against NPS in 2004.

But this lack of unity will not bring anything good.  So, everyone should go in unity and thereby weaken the tactics of divide and rule.

Even if the above said circumstances are hypothetical only, employees under statutory pension may be distracted due to various concerns which exist in the mind of employees und NPS also. Then why should they…?

Ok leave it, now we can forget the past and look forward with realistic approach.

While considering various factors, it is difficult and chances are very low to reinstate the old statutory pension system in government service.   Then the practical way is to propose different modifications in the existing contributory pension system to implement it in more beneficial manner.

Now most of the new employees are ready to contribute to their pension fund and they are mentally adjusted with that.  Even if there is a slight risk factor, I am sure that the benefit of 10% compulsory contribution will bring more happiness at the time of retirement.

A steady growth rate of 12 to 14 percent in NAV can be expected every year which is very high compared to traditional savings schemes. Another notable advantage is the low allocation charge and strict baring in the investment portfolio which reduces both risk and return.

There is no ambiguity and concern up to retirement and receipt of 60% of total net worth in the pension fund.  The confusion actually starts only while thinking about the remaining 40%. 

There is no assurance on option of Annuity Service Provider(ASP) or insurance companies which will be available at the time of retirement.

Inconsistency of pension amount is the main issue and there is no possibility for assured timely progress in pension amount to overcome the inflation like DA in statutory pension. (The only one option allows 3% increase in every year).  Following are the different pension options offered by ASP empaneled by PFRDA.

1.   Annuity/pension payable for life at a uniform rate.

2.   Annuity payable for 5, 10, 15 or 20 years certain and thereafter as long as the annuitant is alive.

3.   Annuity for life with return of purchase price on death of the annuitant.

4.   Annuity payable for life increasing at a simple rate of 3% p.a.

5.   Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.

6.   Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.

7.   Annuity for life with a provision of 100% of the annuity payable to spouse during his/ her life time on death of annuitant. The purchase price will be returned on the death of last survivor.

The clever tactics here applied is that no rate or amount has been mentioned in the available options and the rate of increase is mentioned in only one option which is very low.  When we opt for annual increase of 3% all other benefit like pension for spouse and return of purchase price will have to be ignored.  One thing is clear that pension amount will vary from option to option and there is no provision to switch between options.

What will be your Pension in Contributory Pension System?

Let us see approximately how much pension will get for a central government employee who have come under National Pension System.

If an employee having 20 lakhs rupees in his NPS account retires from service, he will have to spent 8 lakhs rupees (40%) to purchase annuity from any of the insurance company.  As per the existing rate of Annuity Service Provider, the employee will get Rs.3800/- to Rs.5900/- per month as pension.

Normally an employee need to complete 20 years of service to reach 20 lakhs rupees in his contributory pension fund in the existing salary pattern.

For example, suppose if a 40-year-old GDS entered into the departmental service as Postal Assistant in the year 2005 when he completes 12 years in service in 2017 he will have approximately Rs.8,00,000 in this CPF account. He will have approximately Rs.20,00,000/- in his NPS account when he retires in 2025.  

As per present rate he will get an average amount of Rs.4850/-  as monthly pension in 2025. And the same amount will continue forever.

Somebody may think that these figures are only my assumptions. Following are the annuity quotes provided by the Central Recordkeeping Agency applicable to above said example.

Subscriber Type	Government Sector Subscriber
First Annuitant Age	60 years
Purchase Price (excluding taxes in ₹)	8,00,000

Annuity Service Providers		Scheme Names
		Annuity for life	Annuity for life with return of purchase price on death	Annuity payable for life with 100% annuity payable to spouse on death of annuitant	Annuity for life with a provision for 100% of the annuity payable to the spouse of the annuitant for life on death of the annuitant, with return of purchase price on the death of last survivor	Annuity payments would be made to the annuitant and his/ her spouse throughout their lifetime. Thereafter, these payouts would be made to the subscriber's mother and after her, to the father. On death of the father, the purchase price would be refunded to the annuitant's child/ nominee.
		₹	₹	₹	₹	₹
	Life Insurance Corporation of India	5,953.00	4,467.00	5,147.00	4,447.00	Not Applicable
	SBI Life Insurance Co. Ltd	5,712	4,026	4,602	3,837	3,837
	HDFC Life Insurance Co. Ltd	5,549	4,339	Not Applicable	4,282	Not Applicable
	ICICI Prudential Life Insurance Co. Ltd	Not Available	Not Available	Not Available	Not Available	Not Available

If you are interested to check the approximate Pension amount in NPS with different NPS amount and different age, use following link

https://cra-nsdl.com/CRAOnline/aspQuote.html

Can anyone live for ten or twenty or thirty years with same amount of pension. Think of a situation in which a retired employee gets pension of Rs.5900 per month in 2050 at the age of 85. After 33 years the welfare pension will be many times more than this service pension.

I am sure that you may be distracted by above said statistics, if you are an employee coming under contributory pension system.  If nothing changes, the pension of a person who retires from service one month back in same rank having statutory pension facility is incomparably higher than your pension under NPS.

Hybrid Type Contributory Pension

It is better to go for a thing which we can achieve easily or with minimum effort first than waiting for a thing which we cannot be made it as real even in far future by sacrificing everything. 

Hence as a practical move, the demand from the part of employees should be for restructuring the pension payment pattern in NPS in such a way that the pension amount should be equal to eligible service pension as per pension rule at that time and to ensure the timely increase to overcome the inflation instead of blindly demanding for statutory pension.

Seeking various possibilities is not a sin especially in the case of service matters.  We can suggest an amicable solution for this issue without imposing much financial burden on government. It is Hybrid type of NPS in which the government can take over the 40% of the pension fund of an employee at the time of retirement instead of giving it to the insurance company.

Government can increase the percentage of takeover up to 70% if 40% is not sufficient.  Unlike Annuity, no need to refund the amount at any stage. The employee should get the service pension and all other benefits as if he is under statutory pension. This hybrid type of pension will be equally beneficial to the Government and employees. Here the

Conclusion

Creative thinking and fair debate are necessary in all areas and it is the starting point of every revolution. Let’s start the discussion here and pave the way for a big change. Beware that if you don’t come forward to raise and discuss your issues, no one will do for your sake.