- The newly elected Congress Government led by Sukhvinder Singh Sukhu regime has restored the Old Pension Scheme (OPS) for Himachal Pradesh government employees with immediate effect. Some other states are also in line to implement the same. This has stirred a debate around the two variants of Pension Schemes in India.
- In this context, this edition of the burning issue will elaborate on the topic of the types of pension schemes in India.
Background of both the schemes
- Guaranteed pension sum: OPS is a post-retirement benefit for government area representatives that guaranteed a sum to be paid to the worker after his superannuation.
- Defined formula: OPS, also known as the “Defined Benefit Scheme,” provided government employees with 50 percent of their basic salary to secure their future. Therefore, the individual would receive a fixed monthly pension payment from the government of Rs 5,000 if the basic salary was Rs 10,000.
- Dearness allowance: The government tries to find a balance between the salary and the rising cost of living by increasing Dear Allowance twice a year. The increase in DA also allows for a higher salary and, consequently, a higher pension.
- Fully government payable: The government paid for the Old Pension in its entirety. Every year, the budget for pensions was announced during the Budget announcement. The annual DA increase in the pension was also the responsibility of the federal and state governments.
- The origin: In 1998, the Union Ministry of Social Justice and Empowerment commissioned a report for an Old Age Social and Income Security (OASIS) project. Its primary objective was targeted at unorganized sector workers who had no old age income security. The New Pension System was proposed by the Project OASIS report; it became the basis for pension reforms.
- Open to all: NPS is a government-sponsored pension scheme. It was launched in January 2004 for government employees. It was extended to all citizens of India on a voluntary basis from May 2009 and to corporates in December 2011 and to Non-Resident Indians in October 2015.
- No full contribution from the government: PFRDA is the statutory authority established by an enactment of the Parliament, to regulate, promote and ensure orderly growth of the NPS and pension schemes to which this Act applies. The scheme allows subscribers to contribute regularly to a pension account during their working life.
- Fund on retirement: On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.
Key differences between the two pension schemes
|Points of Differentiation
|The Old Pension Scheme
|The New Pension Scheme
|Nature of the schemes
|OPS offer pensions to government employees on the basis of their last drawn salary
|NPS pays the employees for their investments in the NPS Scheme during their employment.
|Amount of pension derived
|50 per cent of the last drawn salary
|60% lump sum after retirement and 40% to be invested in annuities for getting a monthly pension
|Benefits in taxes
|No tax benefits
|The employee can claim tax deductions of 1.5 lakh under Section 80C of income tax and up to 50,000 on other investments under 80CCD (1b)
|Tax on pension
|No tax on pension
|60% of the NPS Corpus is tax-free while the remaining 40% is taxable
|Option of Investment
|Two choices: Active and Automatic
|Who can avail?
|Only government employees
|Any Indian Citizen between 18-65 years.
|OPS scheme can be switched to NPS
|NPS scheme cannot be switched back to OPS in general, but central government employees can switch back to OPS in case of death and disablement of the employee.
Pros and cons of OPS
- After retirement, the plan guarantees a steady income for life.
- Definite formula and pension: Employees were entitled to a pension that was calculated in advance and was equal to fifty percent of their most recent salary under the old plan.
- DA Benefit: They also benefit from Dearness Relief (DR) revisions twice a year. There was no salary deduction for the fixed payout.
- GPF benefit: Additionally, the General Provident Fund (GPF) was provided by the OPS.
- Liability remained unfunded: There was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
- Usual budgetary allocation: The Union budgetary allocations (Rs 3,86,001 crore in 2020-21) provided for pensions every year; there was no clear plan on how to pay year after year in the future.
- The burden on working class: The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
- Far extended pay-outs: Better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
Pros and cons of NPS
- Flexible– NPS offers a range of investment options and a choice of Pension Funds (PFs) for planning the growth of the investments in a reasonable manner and monitoring the growth of the pension corpus. Subscribers can switch over from one investment option to another or from one fund manager to another.
- Simple – Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime.
- Portable– NPS provides seamless portability across jobs and across locations. It would provide a hassle-free arrangement for the individual subscribers while he/she shifts to the new job/location, without leaving behind the corpus build, as happens in many pension schemes in India.
- Well Regulated– NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust. The account maintenance costs under NPS are the lowest as compared to similar pension products across the globe. While saving for a long-term goal such as retirement, the cost matters a lot as the charges can shave off a significant amount from the corpus over 35-40 years of investment period.
- The dual benefit of Low Cost and Power of compounding: Till retirement, pension wealth accumulation grows over the period of time with a compounding effect. With the account maintenance charges being low, the benefit of accumulated pension wealth to the subscriber eventually becomes large.
- Ease of Access: The NPS account is manageable online. An NPS account can be opened through the eNPS portal. Further contributions can also be made online through the eNPS portals of CRAs:
- Deductions from salary: The NPS, in contrast to the OPS, mandates that employees deposit 10% of their base pay in addition to the dearness allowance.
- The amount of the pension is not set in stone, and there is no GPF benefit.
- Linked to market returns: The scheme’s major flaw is that it is return-based and linked to the market. Simply put, the payout is speculative.
Why states are shifting back to OPS?
- OPS brings state governments some short-term gains:
- Deferment to contribution: They save money since they will not have to put the 10 per cent matching contribution towards employee pension funds.
- Low curtailment in salaries: For employees too, it will result in higher take-home salaries, since they too will not set aside 10 per cent of their basic pay and dearness allowance towards pension funds.
- Old age security: Some government employees are concerned that their pension may not be the same as 50 per cent of their last salary drawn (as in the OPS).
- Party politics: These moves may be considered convenient by Opposition parties as they struggle to expand their reach in the current environment.
- States will benefit in the short term, but as pension liabilities rise over time, there will be less room for more productive spending.
Concerns raised due to this shift
- Former RBI Governor Raghuram Rajan has expressed his concern over the decision of some states to restart the old pension scheme and suggested that some less costly ways should be found to address the demands of government pensioners.
- In its latest report titled ‘State Finances: A Study of Budgets of 2022-23’, the central bank reversion to OPS by some States poses a major risk on the “subnational fiscal horizon” and would result in the accumulation of unfunded liabilities in the coming years for them.
- Punjab’s projected pension outlay during 2022-23 is Rs 15,146 crore. This accounts for almost one-third of Punjab’s tax revenues (OTR) of Rs 45,588 crore.
- By postponing the current expenses to the future, the report said States risk the accumulation of unfunded pension liabilities in the coming years.
- Former RBI Governor D. Subbarao has said that the decision of some States to restart the Old Pension Scheme will be decidedly a regressive move and will provide more privilege to government servants at the cost of the larger public, the majority of which has no social safety net,
Other issues with the Pension system in India
- Insufficient coverage: Any pension plan leaves a lot of the Indian population out of pocket. The unorganized sector typically includes those who remain uncovered.
- Insufficient sums: The sums received by those who are covered by various pension plans are insufficient to ensure their continued existence.
- Insufficient pension amount: The Parliamentary Standing Committee on Rural Development observed that the various components of the National Social Assistance Program (NSAP) provided insufficient assistance. It cost between 200 and 500 rupees per month.
- Disparate Coverage: In addition, the implicit rate of returns and benefits minus contributions vary among programs, occupations, industries, and other contexts. and as a result, the pension benefits become unequal.
- Financial viability: The government’s fiscal plan is further strained financially by the pension industry. According to a number of studies, the amount of money spent on pension payments is rising faster than taxes and duties.
- Ineffective management: The issuance of annual statements and the delays in processing and crediting claims are the subject of criticism. The structure of organizational governance also needs to be improved. Additionally, government regulations prevent retirement benefit systems from being transferred to other industries.
- Optimize pension schemes: The government can optimize pension schemes by reviewing the benefits and eligibility criteria of the pension schemes. This can help identify areas where the benefits can be reduced without impacting the employees.
- Increase efficiency in government operations: The government can also work towards increasing efficiency in its operations and reducing the overall workforce. This can help reduce the pension burden and improve the fiscal health of the country.
- The fiscal risks involved in the transition of NPS-borne employees to OPS regime are substantive and to a great extent unsustainable keeping in view the existing share of pensionary liability in government expenditure.
- The hard-won policy gains that have been achieved through bipartisan consensus may be undone by such proposals, which are motivated by short-term political considerations.
- Political parties must consider the long term rather than just the immediate relief and return and resist the temptation to make such fiscally reckless moves.