With Elections Due in Gujarat, AAP and Congress Promise a Return to Old Pension Scheme

What’s in today’s article?

• About OPS (Purpose, Features, Drawbacks)
• About NPS (Purpose, Features, Benefits, Comparison with OPS)

Why in News?

• With elections for the 182-member Gujarat Assembly to be held in December, the Aam Aadmi Party (AAP) and Congress are attempting to halt the BJP’s 27-year rule in the state with a range of poll promises.
• One such promise is the restoration of the Old Pension Scheme (OPS).

About 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 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 serving employees.
• The OPS was discontinued by the Central government in 2003.

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What were the concerns with 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.

About 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 contribute 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.

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.