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The Old Pension Scheme (OPS)
Nov 18, 2022
We will discuss The Old Pension Scheme (OPS) in our today's edition of Current Affairs. Read further to upgrade your UPSC CSE knowledge and also understand the topic’s relevance to the UPSC syllabus.
For Prelims: Current Events of National Importance
Old Pension Scheme (OPS), Defined Benefit Scheme, Old Age Social and Income Security (OASIS) project, New Pension Scheme, high-level expert group (HLEG), Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013.
For Mains:GS Paper II-Government Policies and Interventions
About the Old Pension Scheme (OPS), Issues in the Old Pension Scheme, Government Initiatives towards OPS, Origin of the New Pension Scheme (NPS), Difference between the old (OPS)and new pension schemes (NPS).
States like Rajasthan and Chhattisgarh have reverted back to the Old Pension Scheme. It has been reported recently that Punjab will also revert back to the scheme.
Why has the government started the New Pension Scheme and why are now many state governments restoring the Old Pension Scheme? Comment (10 marks, 150 words)
About the Old Pension Scheme (OPS)
OPS assured or ‘defined’ benefit to the retiree for life-long income. It was hence described as a ‘Defined Benefit Scheme’
The scheme provides 50% of the last drawn basic pay to the government employees at the Centre as well as in states.
Additionally, just like the increase in salaries of the employees, the monthly payouts of pensioners also increased.
The scheme was discontinued in 2004.
The Centre as well as state government employees who have joined before 2004 are eligible for OPS and vice-versa.
Issues in the Old Pension Scheme
Pension Liability: The liability remains unfunded. In a few decades, it has jumped manifold.
No clear planning: In the Government of India's budget for pensions every year; there was no clear plan for payments.
Burdening Taxpayer: The ‘pay-as-you-go’ scheme created inter-generational equity issues, i.e. the present generation had to bear the continuously rising burden of pensioners.
Unsustainable: The increased benefits of pensioners, and increased pension liabilities every year.
Government Initiatives towards OPS
In 1998, the Union Ministry of Social Justice and Empowerment commissioned a report for an Old Age Social and Income Security (OASIS) project for unorganized sector workers who had no old age income security.
The OASIS report proposed the New Pension Scheme.
After the OASIS report, the Ministry of Personnel, Public Grievances, and Pensions set up a high-level expert group (HLEG) for government employees. However, its recommendations didn’t favor the government.
Oasis report proposal for the New Pension System became the basis for pension reforms for unorganized sector workers and for government employees.
NPS was introduced to reduce the burden of pension payments on the state.
It was notified to Central government employees on December 22, 2003.
The Central Civil Services (Pension) Rules, 1972 was amended to introduce the NPS.
It was effective for all the employees joining government service from January 1, 2004, discontinuing the Old Pension Scheme.
Regulator: NPS has been regulated by the Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013.
Contribution: Initially 10% of the basic salary and dearness allowance should be contributed by both the employee and the government. Since 2019, the government has increased its contribution to 14%.
Schemes under the NPS are offered by nine pension fund managers & sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Adita Birla, Tata, and Max.
Difference Between the Old (OPS) and New Pension Schemes (NPS)
In OPS, the pension was fixed as 50% of the last basic salary drawn, along with other benefits. Whereas, the NPS is a contribution-based pension system.
NPS pension benefit is determined by factors such as the amount of contribution made, the age of joining, the type of investment, etc.
Under the Centre’s scheme, every government employee is allotted a Permanent Retirement Account Number and has to mandatorily contribute 10% of pay (now 14%), which the government matched, and dearness allowance to the new pension fund.
This money can then be invested by fund managers.
At superannuation, the employee can withdraw 60% of the corpus but is required to invest at least 40% to purchase an annuity or annual payment from an insurance firm regulated and registered by government authorities.
The interest on the annuity is to be provided as a monthly pension to the employee.
Criticism of the New Pension Scheme
The OPS is better because the retiree gets 50% as a pension.
The NPS is based on the share market and the amount of pension reduces.