Debate | Old Pension Scheme vs New Pension Scheme

Jan. 17, 2023

Why in News?

Recently, the Reserve Bank of India (RBI) has cautioned against the reintroduction of the Old Pension Scheme (OPS) by some states.

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 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’.
- Eg., if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000.
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.

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 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 ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.

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.

Eligibility:

Permanent Retirement Account Number (PRAN):

Every NPS subscriber is issued a card with 12-digit unique number called Permanent Retirement Account Number or PRAN.

Minimum contribution in NPS:

The subscriber has to contribute a minimum of Rs. 6,000 in a financial year.
If the subscriber fails to contribute the minimum amount, his/her account is frozen by the PFRDA.

Who manages the money invested in NPS?

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. The pension amount is 50% of the last drawn salary by the employee.
- Thus, in OPS, the pension amount is constant.
On the other hand, the National Pension Scheme is an investment cum pension scheme.
NPS contributions are invested in market-linked securities, i.e., equity and debt instruments.
- Therefore, NPS doesn’t guarantee returns.
However, the investments, in NPS, are volatile and hence have the potential to generate significant returns.

News Summary:

The RBI has red-flagged the return to the Old Pension Scheme (OPS) by some states as a major concern on the sub-national fiscal horizon.
The RBI said “by postponing current expenses to the future, states risk accumulation of unfunded pension liabilities in the coming years”.
Several states, including Himachal Pradesh, Jharkhand, Punjab, Chhattisgarh and Rajasthan have announced a return to the OPS, promising retired government employees 50% of the last pay drawn as the monthly pension.
Several economists have criticised the move by the states. In several cases, the pension outgo is already high (see graphic below).