Return to old pension plan is big risk for States, warns RBI

Subject : Economy

Section : Fiscal Policy

Concept :

The likely reversion to the old pension scheme (OPS) by some States is a major risk looming large on the sub-national fiscal horizon, according to the Reserve Bank of India’s report on State finances.
Among the States, Chhattisgarh, Rajasthan, Punjab, and Himachal Pradesh have so far restored the OPS for government employees.

Old Pension Scheme

The scheme assures life-long income, post-retirement.
Under the old scheme, employees get a pension under a pre-determined formula which is equivalent to 50% of the last drawn salary.
They also get the benefit of the revision of Dearness Relief (DR), twice a year. The payout is fixed and there was no deduction from the salary.
Moreover, under the OPS, there was the provision of the General Provident Fund (GPF).
- GPF is available only for all the government employees in India.
- Basically, it allows all the government employees to contribute a certain percentage of their salary to the GPF.
- And the total amount that is accumulated throughout the employment term is paid to the employee at the time of retirement.
The Government bears the expenditure incurred on the pension. The scheme was discontinued in 2004.

Concerns:

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.

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 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
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.