National Pension Scheme & Old Pension Scheme

IN NEWS:

• The Punjab government said it was considering reverting to Old Pension Scheme for its employees. If the proposal goes through, Punjab will be the fourth state to have reverted to the OPS, following Rajasthan, Chhattisgarh and Jharkhand.
• A federation of Central government employees’ unions has written to the Cabinet Secretary to restore the Old Pension Scheme, stating that the National Pension System (NPS) is a disaster for retiring employees in their old age.

OLD PENSION SCHEME (OPS):

• In the old system, an employee was guaranteed the right of pension as half of the last basic salary plus dearness allowance at the time of retirement, if the service was not less than 10 years.
• Under OPS, employees were not required to contribute to their pensions.
• In case of death of an employee while in service or after retirement, the provision for family pension was also half of the last basic salary plus dearness allowance.
• Also, at the time of retirement and in case of in-service death, an employee or his family was given economic support, called ‘Death cum Retirement Gratuity (DCRG)’.

NEW PENSION SCHEME (NPS):

• To address the issue of ballooning pension bills, the government commissioned a national project, OASIS – an acronym for “old age social and income security” – in 1999 to examine policies related to old age income security in India.
• Based on the recommendations of the OASIS report, the Atal Bihari Vajpayee government in 2003 decided to discontinue the OPS and introduced the New pension scheme (NPS), also called ‘Defined Contribution Pension System’.
• The scheme, applicable to all new recruits joining Central Government service (except the Armed Forces) from April 1, 2004, is a participatory, market-linked scheme:
  • In the NPS, those employed by the government contribute 10 percent of their basic salary, while their employers contribute up to 14 percent.
  • Individual savings are pooled into a pension fund which are invested by PFRDA regulated professional fund managers in to the diversified portfolios comprising of Government Bonds, Bills, Corporate Debentures and Shares.
  • These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.
  • At the time of retirement, an employee will be given back 60% of this fund and remaining 40% would be have to compulsorily invested as annuity for pension.
• Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and remains with the subscriber throughout their lifetime.
• NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA), with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust.
• Private sector employees can also participate in the NPS voluntarily, although some rules have changed.
• Except West Bengal, all States implemented the NPS. This year, Opposition-ruled Chhattisgarh, Rajasthan, Jharkhand and Punjab announced that they would restore the OPS.
• Till February, there were 22.74 lakh Central government employees and 55.44 lakh State government employees enrolled under the NPS. This year, the government’s contribution is expected to be in the range of Rs 81,000 crore.

WHY GOVERNMENT OPTED FOR NPS?

• Pension debt sustainability:
  • OPS had no accumulated funds or stock of savings for pension obligations and hence was a fiscal burden for the governments. But NPS relies on accumulated funds and is hence more sustainable.
• Prevent burden on future generation:
  • OPS involved transfer of resources from the current generation of tax payers to fund the pensioners. This created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
• Ageing population:
  • Between 1990-91 and 2020-21, the Centre’s bill had jumped 58 times while for states, it had shot up 125 times. With the rise in life expectancy, the proportion of elderly population set to go up to 19% by 2050. Hence, OPS has become unsustainable for governments.
• Prevent early retirements:
  • As the pension is fixed at the last drawn salary, OPS acted as an incentive for early retirement. However, NPS is based on long-term investment fund ideology and it could be better in the case of more than 30 years’ service.
• Freedom of investment:
  • One can contribute once at any time of the year, or do so every month. The minimum contribution required per annum for Tier 1 and Tier 2 accounts is Rs 500 and Rs 1000 respectively.
• Flexibility:
  • NPS offers a range of investment options and choice of Pension Funds. Subscribers can switch over from one investment option to another or from one fund manager to another. Hence, the pensioner has much greater flexibility and a greater sense of control.
• Portability:
  • The PRAN enables hassle-free arrangement for the individual subscribers while they shift to new job/location, without leaving behind the corpus build.

CRITICISM OF NPS:

• Exposure to market risks:
  • Exposure of the retirement funds to vagaries of share market uncertainty increases old age insecurity and thus defeats the purpose of pension.
  • For instance: Life Insurance Corporation (LIC) of India holds 25 per cent stake in the IL&FS and is also one of the NPS fund managers. Hence, the downfall of IL&FS is expected to create loss for pension funds.
• Concerns over pension amounts:
  • There is no provision for minimum guarantee of pension. In case of lesser years’ service, due to lower corpus, the pension is not sufficient for the retiree’s survival.
  • Also, the pension under NPS remain static and there is no Dearness Relief to compensate the inflation as available in the OPS.
• Lethargy in corpus building:
  • In many states, neither employees’ contribution has been deducted for many years nor has government contribution been added. Therefore, no significant pension funds could be accumulated. Hence, employees are getting very low pension.
• Question of accountability:
  • According to NSDL and PFRDA sources, more than Rs 6 lakh crore has been invested in the market. But questions on the guarantee of security of this corpus and the accountability in case of market failures remain unanswered.

CONCLUSION:

• State governments must take a hard look at their current and projected revenue receipts before reverting to the OPS and thereby burdening future generations with commitments that will eat up resources for health, education, and infrastructure.
• At the same time, government need to conduct a review of the existing NPS. Some of the following measures can be adopted to strengthen it:
  • Introduce inflation-indexed annuity products in the NPS.
  • Provide minimum assured return to the subscriber so as to ensure timely social security post retirement
  • A foolproof system needs to be put in place to ensure that all nodal offices and eligible employees are registered under NPS.
  • Delays need to be penalised and compensation effected to avoid loss to the subscriber.

PRACTICE QUESTION:

Q. Shifting to the old pension scheme would be fiscally imprudent. Do you agree? Justify.

Q. India’s pensions system is in a dire need of a reform and doing so will be good economics. Discuss.