A major element of India’s future pension strategy is the adoption by central and state governments of the NPS framework as the basis for future public sector pensions. The Indian central government introduced the New Pension System (NPS) with effect from January 1, 2004. Under the new pension system, the Central Record-keeping Agency (CRA) is required to maintain subscriber accounts and issue a unique Permanent Retirement Account Number (PRAN) to each subscriber. In this system, deductions towards an NPS pension are made from subscriber’s salary on a monthly basis and an equal amount of contribution is made by the Indian central government.
The new pension system covers, at present, all new entrants to central government services but adoption by the State Governments can only be said to have been partially completed. However, Subhash Garg, the Joint Secretary, Ministry of Agriculture in India made the point at the IIEF Pension Policy Conference that the Indian State governments are recognizing that current and future salary and pension expenditure is the largest part of their fiscal expenditures and the DB pension entitlements expose them to highly uncertain pension liabilities. External factors can exacerbate their problems with a recent pay commission recommendation enhancing pensions in some cases by 100%. As a result, all India States barring just three, announced the adoption of the NPS very soon after the Government of India introduced it. Quite a few states have institutionalised the process of making deductions of employee contributions and making their own contributions. These states according to Garg, are now holding pension funds prior to passing them onto the NPS, and are paying interest on the funds accumulated.
There is still some way to go before complete adoption of the NPS framework by the State Governments and progress has been slow according to Garg. Some States have not moved beyond announcements. Some States are faltering on contribution collections, accounting and data and some states are even regressing. Some States, mostly States getting technical assistance from the Asian Development Bank (ADB) have developed institutional mechanisms for collecting contributions, posting them to a ledger and providing individual accounts. Only a handful of States have succeeded in registering with the CRA and getting PRAN accounts even partially opened. Only two States have started uploading data regarding contributions to the CRA, whilst no NPS funds from any State have yet been invested by regulated fund managers.
There are a number of reasons as to why adoption of the NPS by the Indian States has been so slow despite the example of the central government. Garg finds that States are grappling with a number of issues. These include: Building in appropriate rules and systems to adopt and implement the NPS, and in particular, deciding on what should replace existing rules on pensions; a highly inflexible CRA architecture which has been designed for central government employees, with very different requirements from States; a limited understanding of the States’ systems by the CRA; and agreements which the States find very different from what they are used to with external fund managers, trustee banks, custodians etc. As Garg points out, whilst States with centralized records are best placed to adopt the architecture of the NPS, they also have the least incentive.
To move forward at a State level, what is required is a recognition of the various systems the States already have in place, and a developmental role in building up their institutional capacity. As Garg points out, several States have weak IT and data collection capacity. The Government of India and the PFRDA need to adopt a developmental role, much as the ADB have in some states. Indeed, he argues that full implementation of the NPS by the States will have to be taken as a developmental challenge, the “D” part of the PFRDA.
This is a somewhat controversial role, since some would argue, as Gary Hendricks, a senior pension policy specialist does, that trying to combine regulatory activities with development within one agency does not work and leads to conflicts of interest. But for the NPS to be adopted, Garg argues States will have to be helped to develop institutional capacity to: Have the right set of rules and regulations; develop IT capacity and payroll systems to collect contributions and data; collect and compile data and contributions at one central location or at best, at regional and district levels; and have a fair and functioning arrangement with the CRA and fund managers.
Garg also argues the central government needs to work with multilateral agencies to help States develop databases and data management systems. Hendricks also argues forcefully that the awareness of a sense of urgency in implementing the NPS needs to be driven by the central government, and this needs to be a task that continues for at least 18 months. As he says, many States just do not have the knowledge to implement the NPS, and require significant technical and financial assistance. Indeed, some have not been taking contributions from employees for the past 4.5 years after agreeing to implement the NPS, which will lead to serious issues over funding once they eventually do.