OPS vs NPS

2. OPS vs NPS: Basic Difference

Under the OPS, retired employees received 50 percent of their last drawn salary as monthly pensions. NPS is a contributory pension scheme under which employees contribute 10 per cent of their salary (Basic+ Dearness Allowances). The government contributes 14 per cent towards the employees' NPS accounts.

In a nutshell, the detractors of the OPS argue that it is fiscally unsustainable- that is, governments in India do not have the money to fund it- while the detractors of NPS call NPS politically unsustainable-that is, it fails to address the felt needs of the people.

3. Old Pension Scheme (OPS)

Pension to government employees at the centre and states was fixed at 50 per cent last basic pay. Only government employees are eligible for receiving a pension after retirement. Income under the old pension scheme doesn't attract tax.

3.1 What else you should know about OPS

The attraction of the Old Pension Scheme or 'OPS'-called so since it existed before a new pension system came into effect for those joining government service from January 1, 2004- lay in its promise of an assured or 'defined' benefit to the retiree. It was hence described as a 'Defined Benefit Scheme'.
For Example, 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 payouts of pension increased with hikes in dearness allowance or DA announced by the government for serving employees.
DA-calculated as a percentage of the basic salary- is a kind of adjustment the government offers its employees and pensioners to make up for the steady increase in the cost of living.
DA hikes are announced twice a year, generally in January and July. A 4 per cent DA hike would mean that a retiree with a pension of Rs 5,000 a month would see her monthly income rise to Rs 5,200 a month.
As of date, the minimum pension paid by the government is Rs 9,000 a month, and the maximum is Rs 62,500 (50 per cent of the highest pay in the Central government, which is Rs 1,25,000 a month).

3.2 Concerns with OPS

The main problem was that the pension liability remained unfunded; there was no corpus specifically for pension, which would grow continuously and could be dipped into payments.

The OPS was also unsustainable

1. Pension liabilities would keep climbing since pensioners' benefits increased every year; like salaries of existing employees, pensioners gained from indexation, or what is called 'dearness relief"(the same as dearness allowance for existing employees).

2. Better health facilities would increase life expectancy and increased longevity would mean extended payouts.
Over the last three decades, pension liabilities for the Centre and states have jumped manifold. In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and the outgo for all states put together was Rs 3,131 crore. By 2020-21, the Centre’s bill had jumped 58 times to Rs 1,90,886 crore; for states, it had shot up 125 times to Rs 3,86,001 crore.

4. OASIS Project

In 1998, the Union Ministry of Social Justice and Empowerment commissioned a report for an Old age social and Income Security (OASIS) project. An expert committee under S A Dave, a former chairman of SEBI and unit trust of India, submitted the report in January 2000.
The OASIS project was not meant to reform the government pension system-its primary objective was to target unorganized sector workers with no old age income security.
Taking the 1991 Census numbers, the committee noted that just 3.4 crore people, or less than 11 per cent of the estimated total working population of 31.4 crores, had some post-retirement income security- this could be government pension, Employees Provident Fund (EPF), or the Employee Pension Scheme (EPS). The rest of the workforce had no means of post-retirement economic security.
The OASIS report recommended individuals could invest in three types of funds
safe (allowing up to 10 per cent investment in equity), balanced (up to 30 per cent in equity), and growth (up to 50 per cent in equity)- to be floated by six fund managers. The balance would be invested in corporate bonds or government securities. Individuals would have unique retirement accounts and would be required to invest at least Rs 500 a year.
Post-retirement, at least Rs 2 lakh from the retirement account would be used to purchase an annuity. (An annuity provider invests the amount and provides a fixed monthly income which was Rs 1,500 when the report was prepared -for the remainder of the individual’s life.)

5. New Pension Scheme (NPS)

NPS is an easily accessible, low-cost, tax-efficient, flexible, and portable retirement savings account.
Under the NPS, the individual contributes to his retirement account, and also his employer can also co-contribute to the social security/welfare of the individual.
NPS is designed on a Defined contribution basis wherein the subscriber contributes to his account, there is no defined benefit that would be available at the time of exit from the system and the accumulated wealth depends on the contributions made and the income generated from investment of such wealth.
“The greater the value of the contributions made, the greater the investments achieved, the longer the term over which the fund accumulates, and the lower the charges deducted, the larger would be the eventual benefit of the accumulated pension wealth likely to be.”
Simply put, under the old system, pension was fixed as 50 per cent of the last basic salary drawn, along with other benefits. Hence, the benefit due was defined beforehand. However, in the case of the NPS, the pension benefit is determined by factors such as the amount of contribution made, the age of joining, the type of investment, and the income drawn from that investment.

6. Regulator for NPS

PFRDA is the regulator for NPS. Pension Fund Regulatory and Development Authority (PFRDA) is an authority set up by the Government of India through the PFRDA Act 2013 to promote old age income security by establishing, regulating, and developing pension funds to protect the interest of subscribers to the scheme of pension funds and for matters connected therewith or incidental thereto.

7. Annuity

An annuity is a financial instrument that provides for a regular payment of a certain amount of money on a monthly/quarterly/annual basis for the chosen period for a given purchase price or pension wealth. Simply put, it is a financial instrument that offers monthly/quarterly/annual pensions at a specified rate for the chosen period.

8. Tax benefits of NPS

Employee Contribution: Deduction up to 10 per cent of salary (basic+DA) within overall ceiling Rs. 1.50 Lakh u/s 80C.
Voluntary contribution: Deduction up to Rs.50,000 u/s 80 CCD (1B) from taxable income for additional contribution to NPS.
Employer Contribution: Deduction up to 10 per cent of salary (Basic+ DA) from taxable income u/s 80C.

It should be noted that NPS generates market-linked returns without any assurance of returns. OPS provides it by basing the monthly pension on the last salary drawn by the employee.

9. Why the shift to NPS was undertaken?

The shift to NPS was undertaken due to concern over the old pension framework's coverage, sustainability, and scalability. As per the research carried out in the early 2000s, India's implicit pension debt, owing to central (civil) employees, state government employees and the funding gap of the employee's pension scheme, was reaching unmanageable, unsustainable levels. Moreover, this framework only benefited a tiny portion of the total labour force.

For Prelims& Mains

For Prelims: Old pension scheme (OPS), New Pension Scheme (NPS), Pension Fund Regulatory and Development Authority (PFRDA), Old age social and Income Security (OASIS) project.

For Mains:1. Explain the basic difference between Old Pension Scheme (OPS) and New Pension Scheme (NPS). Discuss why there is a need to reform India's pension System.

Source: The Indian Express

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