Govt’s new Unified Pension Scheme walks back on important reforms. It’s disappointing

There is, as yet, no clarity on how the new scheme is going to be operationalised, and what happens to the existing National Pension System architecture.

28 August 2024
The Print

The Union government announced a new Unified Pension Scheme for its employees, which will replace the National Pension System. One can expect that several state governments will also follow suit. This is a big disappointment – not only because we have walked back on important reforms, but also the confusion that surrounds the decision.

The NPS offers a market-linked pension – the contributions are invested, and the accumulated corpus at retirement is to be used to purchase an annuity. This may result in a pension lower than 50 per cent of the last drawn pay, but there would be no future liability on the government (and hence the taxpayer) once the contributions have been made.

The Unified Pension Scheme offers three main benefits. First, it offers employees – with 25 years or more of service – a pension equal to 50 per cent of their last drawn salary (over the past 12 months). Second, if the employee dies before retirement, the family will get a pension equal to 60 per cent of the employee’s basic pay. Third, if the employee quits government service after a minimum of 10 years, the pension will be proportional to the length of service, with a minimum pension of Rs 10,000 per month.

Fourth, all of these payments will be indexed to inflation. That is, as inflation increases, the nominal value of the pension payment will also increase. The increase will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) as in the case of employees in service. Fifth, the gratuity and a lump sum payment at superannuation will be provided.

The government has offered employees the choice to switch to UPS. However, there is, as yet, no clarity on how the new scheme is going to be operationalised, and what happens to the existing NPS architecture.

Lack of clarity on operationalising UPS

One possibility is that the government sets up a separate fund for the UPS, collects contributions, invests them, and uses this fund to pay the pension. The other possibility is that the government continues with the NPS architecture, and everything proceeds as is, except that at retirement, the government guarantees a 50 per cent pension, with an inflation indexation.

There are several unanswered questions for either of these strategies. The government has to clarify the operational and governance guidelines for the UPS. Who will manage the funds, who will do the record-keeping, will an annuity be purchased at retirement, how will inflation indexation be done, will contributions be increased further if funding falls short, what will be the actuarial assumptions that determine the contribution rate, and what happens to existing contributions in the NPS? What are the processes that will ensure that this fund does not see governance failures like we have seen in other Provident Funds, or funding concerns such as that of the Employees Pension Scheme?

If the government chooses to remain conservative in investing the contributions to the UPS and primarily invests in government bonds, then the upside to these contributions is going to be limited. How is it going to ensure the scheme’s fiscal sustainability? What happens to the existing NPS corpus?

If the government plans to continue with the NPS architecture, then presumably the existing infrastructure will continue to plod along. At the time of retirement, however, the current law mandates that at least 40 per cent of the accumulated corpus be annuitised. This 40 per cent may not be enough to buy a pension that is 50 per cent of the last wage. Will the government change the law to say that the corpus should get used to buying an annuity that pays 50 per cent of the last wage, and the rest can be taken on as a lump sum withdrawal? This lump sum withdrawal then acts as the "superannuation" benefit. The annuity market will have to provide an inflation-indexed annuity so that the pensioners get inflation indexation.

Alternatively, is the government going to take the NPS corpus at retirement and provide the annuity itself? Is it going to price the annuity itself, or make a bulk purchase from a life insurance company?

For a scheme that was designed by a high-level committee chaired by the finance secretary, the lack of a report in the public domain, outlining the scheme choices, the transition arrangements and fiscal implications, is disappointing.

The challenge of reform

The larger question that arises from this announcement is how difficult it is to put government finances in order once benefits have been normalised. A pension is seen as a “right” by government employees – part of their overall pay package. We need to start questioning the idea of a compensation package that runs for 30 years post-retirement. And if that is the contract, then suitable adjustments should be made in the compensation up front. Government employees are a small proportion of the country’s labour force, and yet, they consume a large share of the government’s revenues.

The NPS was constituted in 2004 when the country was in fiscal trouble and pension expenditure was considered to be unsustainable. The fiscal situation may look a bit better today than in 2004, but an inflation-indexed pension, even if financed by contributions at the start, runs the risk of becoming unfunded very soon. Government employees should know this more than anyone else. But there is near conviction that fiscal issues will somehow get resolved, and if there are to be cuts in government spending, their pension will not be affected. The country is going to see ramifications of the move back to defined-benefit. Government employees may continue to get their pension, but the consequences will be borne by everyone else.

Kerala’s 24×7 ON Courts is a big judicial reform. It will transform the magistrate’s court

The 24x7 ON Courts system is designed to offer several facilities – litigants, lawyers and law clerks will get logins to monitor their cases, and cases will be filed online.

21 August 2024
The Print

Court delays and high pendencies remain high-priority areas on India’s reform agenda. A remarkable development toward judicial reform occurred at the Kerala High Court on 16 August with the inauguration of ‘24×7 ON Courts’. They have been set up in the Kollam district with support from PUCAR—Public Collective for Avoidance and Resolution of Dispute. This system of ‘Open and Networked Courts’, which builds an IT layer on top of process changes, will go live at the end of September and initially deal with cheque-bouncing cases. The learnings from this experiment will have substantial implications for our justice system, which continues to groan under delays and high pendency 77 years into India’s independence.

What is the system designed to do?

Scholars have pointed to several reasons for delays: a high volume of cases, not enough judges, summons not reaching parties on time, a large number of adjournments, and limited predictability around when the case will be listed and heard. Some of these problems are deep-rooted and have no easy fixes. However, many can be resolved through improved IT systems that streamline court processes.

The 24×7 ON Courts system is designed to offer several facilities – litigants, lawyers and law clerks will get logins to monitor their cases; cases will be filed online, as will all applications for adjournments. A scheduling system will be used for listing matters in court, and a list of tasks will provide stakeholders with information on what is expected of them in terms of the next steps. There will also be full integration with ePost, an Integrated Core Policing System (iCoPS) for summons and warrants, and dashboards for the judge with information on case progression.

Further, it will allow both parties to reschedule hearings ahead of time to avoid adjournments. If a party cannot attend court, it can request to reschedule its hearing. Parties commit to specific dates based on availability before the next hearing. The adoption of this system by the Kerala High Court is an enormous achievement, especially given the general reluctance we have seen from courts to innovate on process reform.

Potential gains

What should we expect from the 24×7 ON Court in the Kollam magistrate?

One of the core recommendations for legal reform has been that the judicial function should be separate from the administrative function. In a hospital, the surgeon only performs the surgery; the administrative staff makes decisions about the hospital’s maintenance, staffing, and scheduling. We have yet to achieve this separation of functions in our courts. This may change with the new system. If processes are streamlined, it may free up the judges’ time for more substantive questions.

In any case, any IT system should be an improvement over current functioning. Many existing frictions will be resolved if the system can bring about predictability around hearing schedules, and enable online hearings so that people don’t have to travel long distances. It will also help if the court registry can speak to two parties regarding non-judicial decisions without a hearing, and if lawyers can make submissions asynchronously.

Finally, the system generates data on the various processes in a court. As of today, no one knows precisely how much time a case takes, how many hearings occur before it gets closed, who seeks adjournments, the reasons for requesting adjournments, and where the frictions are. Most analyses have looked at a subset of the data available on High Court websites, which does not give these details. Analysing the functioning of district courts is even more challenging.

The system will ensure that the data is at least collected and maintained. Anecdotally a cheque-bouncing case, if one were to sit in court and count the minutes of airtime, is probably less than two hours but gets dragged two-plus years. This new system will give us a sense of that fragmentation.

It should give the judge a big picture of what is happening in the aggregate and the actual hurdles in certain cases. For example, if the judge can see that a specific party is always asking for adjournments, they can ask why this might be so. The reasons for adjournments will be recorded more clearly, providing a window into the parties’ incentives to resolve the case. When the data is made available to the larger ecosystem, as it should, it will help generate more knowledge on different dimensions of the justice system and its impact on the larger economy.

Wait and watch

Technology is helpful because it helps resolve friction. However, it is not designed to solve the deeper incentive issues that afflict any system. For example, parties often don’t show up or keep seeking adjournments because delay may be in their interest. An IT process does not address the incentive issue directly, but by shining light on a pattern, it may at least bring it to the forefront. Further, an IT system is only as good as the processes it is built on. If the underlying process is cumbersome, then the IT system will make it smoother, but not entirely reform it. There needs to be a constant effort to improve the process design in our courts.

It’s important to be careful of unanticipated effects. The current innovation has been applied to cheque-bouncing cases. If incentives triumph over technology, parties may contract differently to avoid going through a more streamlined process. At an extreme, they may replace post-dated cheques with some other form of collateral. The full impact of the system will only be known over time. This is not to suggest that systems should not be put in place, but only that we must be careful in measuring direct and indirect outcomes stemming from any such intervention.

The 24×7 ON Court is a significant milestone in India’s court reform journey. It is particularly important because it brings about change at a magistrate’s court, which has the maximum pendency and minimum policy attention. Hopefully, this experiment will encourage the Kerala High Court to expand the system to other matters. It will also inspire other High courts to think, from first principles, about their pain points and develop solutions.