Explained: National Pension Scheme (NPS) vs Old Pension Scheme (OPS)

What actually is the matter with old and new pension (National Pension Scheme) schemes? Is it a mere political gimmick, or does it have economic considerations too? Here is a comprehensive report.

How big is the elderly population in India?

Rising population

India’s elderly population has been steadily increasing since 1961. Between 2001 and 2011, more than 27 million people were over the age of 60. According to the Report of the Technical Group on Population Projections for India and States 2011–2036, it anticipates 67 million men and 71 million women among India’s 138 million elderly in 2021.

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In 2021, it represented a roughly 34 million elderly persons increase over the Population Census of 2011, with an additional 56 million elderly people expected to be added in 2031.

The report shows an increasing trend in the percentage share of elderly persons in the total population of India since 1961. In 1961, at least 5.6% of the population was in the age bracket of 60 years or more, the proportion increased to 10.1% in 2021 and is likely to increase further to 13.1% in 2031. A similar trend has also been observed in rural as well as urban areas. In rural areas, the proportion of elderly persons has increased from 5.8% in 1961 to 8.8% in 2011, whereas in urban areas it has increased from 4.7% to 8.1% during 1961 to 2011.

State-wise demography figures

According to the report’s state-by-state data on the elderly population of 21 major states, Kerala has the highest proportion of elderly people (16.5%), followed by Tamil Nadu (13.6%), Himachal Pradesh (13.1%), Punjab (12.6%), and Andhra Pradesh (12.4%) in 2021. On the contrary, the proportion is lowest in Bihar (7.7%), followed by Uttar Pradesh (8.1%) and Assam (8.2%).

Similarly, for the year 2031, Kerala is expected to have the highest proportion of elderly people in its population (20.9%), followed by Tamil Nadu (18.2%), Himachal Pradesh (17.1%), Andhra Pradesh (16.4%), and Punjab (16.2%).

Rise in life expectancy rate

The term “life expectancy” refers to how many years a person can expect to live. Life expectancy is defined as an estimate of the average age at which members of a specific population group will die.

As per UN estimates, India’s life expectancy, which is presently (as of 2022 figures) 70.19 years, will be 81.96 in the year 2100. To appreciate this, it must be noted that India’s life expectancy in 1950 was 35.21. In 150 years, India’s improvement will be 57%, if we go by the estimates.

Higher life expectancy numbers have been attributed to improved diets, better medical care, and healthier lifestyles over time. Clean water, antibiotics, vaccines, and more abundant and nutrient-dense food are all accessible to people. Additionally, more people are conscious of the advantages of healthy lifestyle choices and exercise.

The statistics are certainly positive, indicating the country’s growing wellbeing; however, they also point to the lingering question of how to sustainably support one-tenth of our population, with the share and longevity increasing further.

There is a large existing population of destitute elderly people aged 60 and up. Given the government’s financial situation and the size of this population, there are no simple solutions to providing them with income security. At the same time, given the magnitude of the problem, this issue cannot be overlooked.

One such instrument of the social safety net is the pension fund. The government established a pension schemes for its employees.

Defined benefit pension or Old Pension Scheme (OPS)

Under the OPS, employees receive a pension based on a predetermined formula equal to 50% of their final pay. They also benefit from the Dearness Relief’s twice-yearly revision. Here, the government covers the full cost of the pension.

It also includes a General Provident Fund (GPF), to which every government employee contributes a portion of their salary. The employee receives the total amount accumulated over the course of their employment when they retire.

However, after noticing flaws in the system, the Bharatiya Janata Party (BJP)-led central government discontinued the scheme in 2004, and the centre, along with all states, shifted to the NPS (now called the National Pension Scheme). The report from the Old Age Social and Income Security (OASIS) project, commissioned by the Union Ministry of Social Justice and Empowerment in 1998, is credited as the germination point of NPS.

Criticism of the Old Pension Scheme

Unaffordable for state exchequer

A data from the Centre for Monitoring Indian Economy (CMIE) states that the share of pension spending in state revenue has been steadily increasing. It was less than 10% at the beginning of the reform period and had increased to more than 25% by 2020–21.

Himachal Pradesh, Rajasthan, Chhattisgarh, and Jharkhand have now returned to the OPS. According to the State Bank of India’s (SBI) October 2022 Ecowrap, the current value of aggregate pension liabilities if all states switch to the old scheme will be in the range of ₹31.04 lakh crore.

It further estimates that “the total pension liability for the three states, Chhattisgarh, Jharkhand, and Rajasthan, comes to ₹3 lakh crore. When looked at in relation to own tax revenue, the pension liabilities of states would be as high as 450% of own tax revenue in the case of HP and 138% of own tax revenue in the case of Gujarat.”

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Unfunded pension liabilities

Pensions are paid for by the government; there is no pension-specific corpus that grows and is available for payments. As a result, taxes collected from the current working class are used to pay for benefits.

According to Jitendra Singh, Union minister of state, personnel, the number of people receiving central government pensions exceeds the number of active employees. “There are more pensioners, about 77 lakh, than active-duty personnel, which is about 50–60 lakh,” The Hindu quoted him as saying.

Singh also stated that there are 6,000–7,000 pensioners who are ‘over 100 years old’ and receive the same amount as a pension as they did as a salary. While nearly one lakh pensioners are between the ages of 90 and 100.

Unsustainability

The increase in the elderly population and their life span, as we have already seen above, simply means an increase in liabilities. The increase is two-fold, as the pensioners’ benefits also increase every year, like salaries of existing employees, because they are indexed for dearness relief. These come as a massive burden on public finances.

Benefits few

Another criticism of OPS is that it costs the government a lot of money while only benefiting a few people. Under the scheme, only government employees, and only those who have worked for at least 20 years, are eligible.

The OASIS project highlighted the problem in its report. Based on the data available from the 1991 Census data, India has an estimated 314 million workers. 15.2% (47 million) of the working population is salaried, while over 53% (166 million) are self-employed, and 31% (97 million) are casual/contract workers.

Around 23% (11.13 million) of salaried employees are employed by the Central, State, and UT governments and departments (including post and telegraph, the armed forces, and railways) and are eligible for OPS.

A mandatory Employee Provident Fund (EPF) and the Employee Pension Scheme cover approximately 49% (23.18 million) of salaried (non-government) workers. These schemes are fully funded by the contributions of both employers and employees.

As a result, only 34 million (or less than 11%) of India’s estimated working population is eligible to participate in formal provisions designed to provide old-age income security.

The existing provisions, on the other hand, exclude 28% (13 million) of the salaried workforce and approximately 268 million workers in the unorganised sector (including farmers, shopkeepers, professionals, taxi drivers, casual or contract labourers, and so on). As a result, nearly 90% of India’s workforce is ineligible to participate in any scheme that allows them to save for economic security in old age.

Providing the statistics, the report noted that most individuals in India are outside the organised sector. As a result, the concept of a “regular monthly salary” is foreign to the majority of Indians, and the concept of a “monthly pension contribution” is equally foreign, it added.

“A pension system for India should thus be flexible and useful to this mass of individuals, not just to the small fraction of people in India who work in the organised sector, have a “regular monthly salary”, and undergo very little job mobility,” the project’s report said.

To address the shortcomings, the OASIS project outlined a new pension scheme. “The new pension system should be based on individual retirement accounts. An individual should create this account, have a passbook where he/she can see a balance that is his notional wealth at that point in time, and control how this wealth is managed. This account should stay with him/her regardless of where the beneficiary is or how he/she works. He/she would make contributions towards his pension into this account through working life (whether employed in the organised sector or not), and obtain benefits from it after retirement for the rest of the life.”

Centre introduced NPS in 2003. It is applicable to all new employees joining the central government service, except the armed forces, who join government service on or after January 1, 2004.

National Pension Scheme (NPS)

The NPS is a defined contribution, voluntary pension system that is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Initially designed in 2004 as an alternative to pensions for government employees, it was voluntarily extended to all Indians in 2009, including self-employed professionals and others in the unorganised sector. Employees contribute 10% of their basic salary to NPS, while employers contribute up to 14%.

NPS is a market-linked annuity product in which you invest a set amount on a regular basis during your working life and receive an annuity when you retire. Individual contributions to the NPS are consolidated into a pension fund, which invests in a diversified portfolio of government bonds, bills, corporate debentures, and shares. PFRDA-regulated professional fund managers (PFMs) manage the investments, which include SBI, LIC, and UTI, among others. If your pension is less than Rs. 2 lakh, you can withdraw the entire amount when you retire. Otherwise, you can withdraw up to 60% of the corpus and invest the remaining 40% in one of the eight available annuities.

Structure of NPS

NPS has a two-tier structure: a pension account that provides tax benefits and is required for NPS enrolment, and an optional account that allows for withdrawal flexibility. The Tier-1 account is the required primary account that also serves as the pension account. Tier-2 accounts are linked to Tier-1 accounts and are intended to be used as investment accounts. Depending on your investment objectives, you can invest exclusively in a Tier-1 account or in a combination of Tier-1 and Tier-2 accounts. (ALSO READ: Plan your retirement with National Pension Scheme)

There is no limit to the amount you can invest in a Tier-1 account. However, once the account is opened, you must invest at least Rs. 1,000 in a given fiscal year. Investments of up to Rs. 1.5 lakh in the tier-1 account are tax-free under Section 80CCD(1), and additional investments of up to Rs. 50,000 are tax-free under Section 80CCD(2) (1B). This account also allows for employer contributions, which are tax-free under Section 80CCD (2). Gains on maturity are also tax-free if at least 40% of the returns are invested in an annuity plan. However, because it is a retirement account, withdrawals are restricted.

NPS also has Tier-2 functions, similar to a traditional mutual fund scheme, and is extremely low cost, with an expense ratio of 0.01%. There are no maximum investment limits or withdrawal restrictions. However, neither the money invested nor the profits are tax-free. The earnings on NPS Tier-2 account contributions are taxed at the applicable slab rates.

How to open an NPS account

An NPS account can be opened online in a matter of minutes. You must link your PAN or Aadhaar card as well as your mobile number to your NPS account. You can use the OTP sent to your mobile device to complete the validation. After completing the registration process, you will be given a Permanent Retirement Account Number (PRAN), which you can use to access your NPS account.

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Criticism of NPS

Many states, including Himachal Pradesh, Rajasthan, Chhattisgarh, and Jharkhand, all non-BJP ruled, have reverted back to OPS. One of the major arguments for bringing back OPS is that they want to save their fiscal resources.

More fiscal space now

To understand this, it should be noted that NPS was not implemented retroactively. NPS is for employees who started working for the government in 2004 or who retired after that date. If the average age of these employees when they joined is assumed to be 30, the first cohort of NPS retirees will be generated in 2034. (assuming a retirement age of 60). Thus, under the OPS, the liability to pay for this cohort of employees will come in 2034 and not now. However, under the NPS, states have to presently set aside funds in their pension funds as their contribution.

Employees demand

A section of government employees says that by bringing in the NPS, the government is putting the social security of workers at stake. NPS is not as attractive as OPS for them. Under the new mechanism, employees will be required to deposit 10% of the basic pay, along with the dearness allowance, as their contribution to the pension corpus. Moreover, NPS does not offer GPF (General Provident Fund).

Another issue with the new scheme is the uncertain amount of the pension. Under NPS, the pay-out is market-linked and return-based, unlike OPS, where it is predetermined.

Under OPS, the employees need not contribute anything to their pensions, so they have more cash as a monthly salary.

Political angle

One must also understand that government employees are a big vote bank. Thus, restoration of the older scheme has become a big agenda item in the election manifestos of political parties.

OPS rollback has been a big political issue, with several parties echoing the demand of employees in hope of banking handsome votes. An HT analysis showed that in recent Gujarat and Himachal Pradesh assembly elections, the issue had indeed gained traction, translating into votes.

An examination of postal ballots may aid in answering this question, though not conclusively. Postal ballots are mostly used by government employees who are unable to vote on election day due to election duty deployment.

Congress, which promised restoration of OPS if elected to power, has performed better in postal ballots in both Himachal Pradesh and Gujarat.

If only postal ballots are counted, the Congress Party led in 50 of Himachal Pradesh’s 68 assembly constituencies (ACs). Even in Gujarat, the Congress had increased its lead to 27 from 17 in the current assembly. While these figures are not conclusive proof of political support due to the OPS promise, the vote share can help a party win elections if it is within striking distance.

Centre rolls out a one-time option for select employees to opt for OPS

The central government recently decided to offer a one-time option for the “Old Pension Scheme” to a select group of central government employees. The move was initiated in response to various representations, references, and court decisions, according to a notification issued by the Ministry of Personnel, and included consultation with the Departments of Financial Services, Personnel & Training, Expenditure, and Legal Affairs.

“Representations have been received… from the government servants appointed on or after January 1, 2004, requesting the extension of the benefit of the pension scheme under the Central Civil Services (Pension) Rules, 1972 (now 2021) on the ground that their appointment was made against the posts or vacancies advertised or notified for recruitment prior to notification for the NPS, referring to court judgements of various Hon’ble High Courts and Hon’ble Central Administrative Tribunals allowing such benefits to applicants,” the ministry’s order stated.

According to the order, public employees who are eligible for the option but choose not to use it by the deadline will remain covered by the National Pension System.

What is the eligibility criteria?

Employees who joined the central government before December 22, 2003, the date the National Pension System (NPS) was announced, are eligible to join the old pension scheme under the Central Civil Services (Pension) Rules, 1972 (now 2021).

“It has now been decided that, in all cases where the central government civil employee has been appointed against a post or vacancy which was advertised or notified for recruitment or appointment, prior to the date of notification for the National Pension System, i.e., December 22, 2003, and is covered under the National Pension System on joining service on or after January 1, 2004, they may be given a one-time option to be covered under the CCS (Pension) Rules, 1972 (now 2021),” the order read.

Deadline

By August 31, 2023, the select group of government employees will be able to opt into the Old Pension Scheme. Once exercised, the option is final.