Old Pension Scheme & New Pension Scheme

Context: Some non-BJP-ruled states, including Himachal Pradesh, Rajasthan, Chhattisgarh, Jharkhand, and Punjab, have decided to return to OPS, while a few others have been said to be considering the move.

About Old Pension Scheme (OPS)

• In OPS, the pension to government employees at the Centre as well as states was fixed at 50 per cent of the last drawn basic pay. This entire amount was paid by the Government.
• The attraction of the OPS lay in its promise of an assured or ‘defined’ benefit to the retiree. It was hence described as a ‘Defined Benefit Scheme’.
• In OPS, the pension constituted 50% of the last drawn salary of an employee.

Benefits of reverting back to OPS

• Short-term gains for the state government: they save money since they will not have to put the 10 percent matching contribution towards employee pension funds.
  • For employees too, it will result in higher take-home salaries, since they too will not set aside 10 percent of their basic pay and dearness allowance towards pension funds.

Concerns with OPS

• Pension liability remained unfunded: there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
  • The Government of India budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.
  • The government estimated payments to retirees ahead of the Budget every year, and the present generation of taxpayers paid for all pensioners as on date.
  • Overall, pension payments by states eat away a quarter of their own tax revenues. For some states, it is much higher. For Himachal, it is almost 80 per cent (pensions as a percentage of the state’s own tax revenues); for Punjab it is almost 35 per cent; for Chhattisgarh 24 per cent; and for Rajasthan 30 per cent.
  • The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners. Today’s taxpayers paying for the ever-increasing pensions of retirees, with Pay Commission awards almost taking the pension of old retirees to current levels, means the pension of someone who retired in 1995 may well be the same as that for someone who retires in 2025.
• Unsustainable:
  • Firstly, pension liabilities would keep climbing since pensioners’ benefits increased every year; like salaries of existing employees, pensioners gained from indexation.

• Secondly, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
  • Over the last three decades, pension liabilities for the Centre and states have jumped manifold. In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and the outgo for all states put together was Rs 3,131 crore. By 2020-21, the Centre’s bill had jumped 58 times to Rs 1,90,886 crore; for states, it had shot up 125 times to Rs 3,86,001 crore.

About New Pension Scheme (NPS)

• The New Pension System proposed by the Project OASIS report became the basis for pension reforms – what was originally conceived for unorganised sector workers, was adopted by the government for its own employees.
• The government thus replaced this PAYG system with the national pension scheme (NPS) or contributory pension scheme which was made mandatory for employees who joined on or after April 1st, 2004.
• NPS is a tax-efficient fund which gets accumulated throughout the career of a person and acts as an income after their retirement.
• Regulation: under the PFRDA (The Pension Fund Regulatory & Development Authority) Act, 2013

Who Can Join?

• Any citizen of India (both resident and Non-resident) and Overseas Citizen of India (OCI) in the age group of 18-70 years. Earlier, the maximum age for entry was 65. In Aug 2021, PFRDA increased the maximum age limit to 70.
• Different SectorsGovernment SectorCentral Government: Introduced with effect from January 1, 2004 (except for armed forces). State Government: Almost all the State Governments (except few such as West Bengal) have also adopted NPS through their own notifications.Private Sector (Non-Government Sector):CorporatesAll Citizens of India: Any individual not being covered by any of the above sectors has been allowed to join NPS 2009 onwards.

• Contribution: Every government employee has to mandatorily contribute 10% of pay and dearness allowance to the pension fund, which is matched by the government. This money can then be invested by fund managers. After the latest amendment, in 2019, the government share of the contribution has been raised to 14% from 10%. The State Governments have also been given an option to increase their contribution to 14% through their own gazette notification.
• What happens to the contribution?  Invested in certain pension funds which in turn invest in different asset classes such as G-secs, shares, bonds etc. to generate higher returns.
• Returns:  NPS is designed on a Defined contribution basis wherein the subscriber contributes to his account. However, there is no defined benefit that would be available at the time of exit from the system. The accumulated wealth depends on the contributions made and the income generated from investment of such wealth.
• Withdrawals:
  • Upon Normal Superannuation: At least 40% of the accumulated pension wealth of the Subscriber has to be utilised for purchase of annuity providing for monthly pension of the Subscriber and the balance is paid as lump sum to the subscriber.
  • Upon Death: The entire accumulated pension wealth (100%) would be paid to the nominee/legal heir of the Subscriber and there would not be any purchase of annuity/monthly pension.
  • Exit from NPS Before the age of Normal Superannuation – At least 80% of the accumulated pension wealth of the Subscriber should be utilised for purchase of an annuity providing the monthly pension of the Subscriber and the balance is paid as a lump sum to the Subscriber.
• The basic difference is that the NPS is a contribution-based pension system. Under the old system, pension was fixed as 50% of the last basic salary drawn, along with other benefits. Hence, the benefit due was defined beforehand. However, in the case of the NPS, the pension benefit is determined by factors such as the amount of contribution made, the age of joining, type of investment, and the income drawn from that investment.
• Over the last eight years, the NPS has built a robust subscriber base, and its assets under management have increased.
  • As on October 31, 2022, the Central government had 23,32,774 subscribers, and states had 58,99,162 subscribers.
  • The corporate sector had 15,92,134 subscribers, and the unorganised sector 25,45,771.
  • There were 41,77,978 subscribers under the NPS Swavalamban scheme. The total assets under management of all these subscribers stood at Rs 7,94,870 crore as on October 31, 2022.

Different Types of NPS Accounts

Difference between New Pension Scheme and Old Pension Scheme