Old Pension Scheme vs New Pension Scheme

What’s in today’s article?

• Why in News? 
• What is Old Pension Scheme (OPS)?
• What were the concerns with the OPS?
• What is New Pension Scheme (NPS)?
• What is the Difference between NPS and OPS?
• News Summary

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 is 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 attract ion of the Old Pension Scheme or ‘OPS’ lay in its promise of an assured or ‘defined’ benefit to the retiree. It was hence described as a ‘Defined Benefit Scheme’.
• To illustrate, 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 s erving employees.
• The OPS was discontinued by the Central government in 2003.

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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.
• Nodal agency: Pension Fund Regulatory and Development Authority (PFRDA)
• Eligibility: 
• Any Indian citizen between 18 and 60 years can join NPS.
• NRIs (Non-Residential Indians) are also eligible to apply for NPS.
• 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 contribue the minimum amount, his/her account is frozen by the PFRDA.
• Who manages the money invested in NPS? 
• The money invested in NPS is managed by PFRDA-registered Pension Fund Managers.
• At the moment, there are eight pension fund managers.

What is the Difference between OPS and NPS? 

• 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

 Image Caption: Pension to Revenue Expenditure Ratio

• 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).

Source: TOI |IE