Andhra’s Guaranteed Pension Scheme

Feb. 6, 2023

Why in news?

At a time when the country is debating Old Pension Scheme (OPS) Vs. New Pension Scheme (NPS), a new model, proposed by the Andhra Pradesh government, has caught the attention of the Union Finance Ministry.

What’s in today’s article?

What is the Old Pension Scheme (OPS)?

OPS offers pensions to government employees on the basis of their last drawn salary (50% of the last drawn basic monthly salary).
The attraction of the Old Pension Scheme lay in its promise of an assured or ‘defined’ benefit to the retiree. It was hence described as a ‘Defined Benefit Scheme’.
Also, like the salaries of government employees, the monthly pay-outs of pensioners also increased with hikes in dearness allowance or DA announced by the government for serving employees.
The OPS was discontinued by the Central government in 2003 from April 1, 2004.

What were the concerns with the OPS?

The main problem was that the pension liability remained unfunded — that is, there was no corpus specifically for pension, which would grow continuously
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 ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
Recently, RBI red-flagged the return to the OPS by some states as a major fiscal concern.
- Several states, including Himachal Pradesh, Jharkhand, Punjab, Chhattisgarh and Rajasthan have announced a return to the OPS.
- In this regard, the RBI said “by postponing current expenses to the future, states risk accumulation of unfunded pension liabilities in the coming years”.

What is New Pension Scheme (NPS)?

As a substitute of OPS, the NPS was introduced by the Central government in April, 2004.

This pension programme is open to employees from the public, private and even the unorganised sectors except those from the armed forces.
The scheme encourages people to invest in a pension account at regular intervals during the course of their employment.
After retirement, the subscribers can take out a certain percentage of the corpus.

The beneficiary receives the remaining amount as a monthly pension, post retirement.

What is the Difference between NPS and OPS?

The Old Pension Scheme is a pension-oriented scheme. It offers regular pensions to employees during retirement.
- Thus, in OPS, the pension amount is constant and guaranteed.
On the other hand, the National Pension Scheme is an investment cum pension scheme.
Therefore, NPS doesn’t guarantee fix returns as it is subjected to market volatility.
- i.e., in NPS, contributions are defined, but benefits depend on the market.

News Summary: Andhra’s Guaranteed Pension Scheme

While no proposal is on the Union Finance Minister’s table yet, there are discussions about a new pension model, proposed by the Andhra Pradesh government.
What has attracted officials in the Union government about this model is it combines the elements of both the OPS (defined benefit) and the NPS (defined contribution).

What is the Andhra Pradesh government’s proposed pension model?

It is attractively called the ‘Guaranteed Pension Scheme’ or the GPS.
Employees can get a guaranteed pension of 33 per cent of their last drawn salary if they contribute 10 per cent of their basic salary every month which is matched by a 10 per cent contribution by the state government.
- They can get a guaranteed pension of 40 per cent of their last drawn salary, if they are willing to contribute a higher (14 per cent) of their salary every month.
  - This will be matched by 14 per cent government contribution.

Why the model proposed by the Andhra Pradesh government resonates?

The old pension scheme is fiscally unsustainable is a fact; parties are not too sure if its good politics either.
That’s where the Andhra Pradesh model is finding resonance:
- It acknowledges states can’t get back to the old, and yet takes a bold leap that a guarantee, even if not 50 per cent of salary, may be possible.

What could Union Government learn from this model?

Officials in the Union government pointed out that the return under NPS is about 9.5 per cent or so.
Hence, the average monthly pension for government employees under the NPS could be at least 40 per cent of their last drawn salary.
While OPS offered 50% of the last drawn salary, this gap of approx. 10% - under NPS – can be addressed innovatively.
The innovation could come in the form of the Central government making up for the 10 per cent gap between the returns.
This may also be possible by increasing the quantum of monthly contribution by the government under the New Pension Scheme.

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