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RESTORING THE OLD PENSION SCHEME

Apr 04, 2022

RESTORING THE OLD PENSION SCHEME

 

Why in News?

Many states are demanding to restore the Old Pension Scheme and roll back the National Pension System (NPS).

National Pension System (NPS)

  • The Central Government introduced the National Pension System (NPS) with effect from January 2004 (except for armed forces).
  • The NPS was launched as a way for the government to get rid of pension liabilities. According to a news report that cited research from the early 2000s, India's pension debt was reaching uncontrollable levels.
  • The NPS allows subscribers (government employees) to decide where they want to invest their money by contributing regularly in a pension account throughout their career.
  • After retirement they can withdraw a part of the pension amount in a lump sum and use the rest to buy an annuity for a regular income.
  • NPS is being implemented and regulated by PFRDA (Pension Fund Regulatory and Development Authority) in the country.
  • National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.
  • The All Citizens Model of the NPS allows all citizens of India (including NRIs) aged between 18 - 70 years to join NPS.
  • It is a participatory scheme, where employees contribute to their pension corpus from their salaries, with matching contributions from the government. The funds are then invested in earmarked investment schemes through Pension Fund Managers.
  • At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed.
  • Even private individuals can opt for the scheme.

Challenge with Old Pension Scheme

Under the old scheme, employees get a pension under a pre-determined formula which is half 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).

The NPS however, requires employees to deposit 10% of the basic pay, along with the dearness allowance. There is no GPF advantage and the amount of pension is not fixed. The major issue with the scheme is that it is market-linked and return-based. In simple terms, the payout is uncertain

Old Pension Scheme

  • The scheme assures life-long income, post-retirement.
  • The Government bears the expenditure incurred on the pension. The scheme was discontinued in 2004.
  • Usually the assured amount is equivalent to 50% of the last drawn salary.
  • Economists say the issue is simple -- longer lifespans meaning more pension payout - For instance, employees retiring at 60 and having an average lifespan of nearly 80 years or more have to be paid for over two decades after superannuation.

Pension Fund Regulatory and Development Authority

  • It is the statutory Authority established by an enactment of the Parliament, to regulate, promote and ensure orderly growth of the National Pension System (NPS).
  • It works under the Department of Financial Services under the Ministry of Finance.

 

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