Pensions have been a major topic of discussion throughout India, largely due to several political parties promising to reinstate the Old Pension Scheme (OPS) in some states. To fully understand the significance of this move, it’s essential to understand the history and details of both old and new pension schemes in India.
Understanding the Old Pension Scheme (OPS)
Launched in 2004, the OPS was a government-backed scheme that assured a lifelong income for government employees after retirement. The payout was equivalent to 50% of their last drawn salary and was not deducted from the individual’s salary during their term of employment.
The OPS also featured a benefit known as the Dearness Relief (DR), which underwent revisions twice a year. Another significant feature was the General Provident Fund (GPF), which allowed government employees to contribute a portion of their salary, with the total amount paid out upon retirement.
However, the OPS faced considerable criticism over its lacking a specific corpus for pensions and looming unfunded pension liabilities. Despite annual budget provisions for pensions, the absence of a clear long-term plan made the OPS unsustainable.
Introducing the National Pension Scheme (NPS)
To address these issues, the Union Ministry of Social Justice and Empowerment initiated an Old Age Social and Income Security (OASIS) project in 1998. The OASIS report proposed a new system targeted primarily at unorganised sector workers who lacked old age income security. This included the implementation of a unique retirement account system where individuals could invest in several types of funds.
Following the OASIS proposal, the National Pension Scheme (NPS) was introduced in January 2004, except for armed forces. It aimed to eliminate the government’s ongoing pension responsibilities, which had been escalating to uncontrollable levels.
How Does the New Pension Scheme Work?
The NPS is a participatory scheme where both employees and the government contribute to the pension fund. These funds are then directed into several investment schemes through Pension Fund Managers.
Essentially, those employed by the government contribute 10% of their salary, with their employers adding up to 14%. Upon retirement, individuals can withdraw up to 60% of their accumulated amount tax-free, while the remaining 40% is invested in annuities.
The NPS primarily covers all Indian citizens between the ages of 18 and 70. It is currently regulated by the Pension Fund Regulatory and Development Authority (PFRDA), with the National Pension System Trust (NPST) serving as the registered owner of all assets under the NPS.
Issues Associated with the National Pension Scheme
Despite its advantages, the NPS also faces several criticisms. The primary among these is that it requires employees to deposit 10% of their basic pay plus the dearness allowance. Unlike the OPS, the NPS doesn’t provide the GPF advantage, and the amount of pension isn’t fixed.
Furthermore, the scheme’s reliance on market performance means the pensions are return-based and not assured. Consequently, the payout remains uncertain, sparking widespread concern and debate about the effectiveness of the NPS in providing secure post-retirement income.
Last Modified: February 18, 2024