Developing a healthy and equitable Social Security system remains a major challenge for underdeveloped as well as developing economies across the world. Providing economic security and assistance to the vulnerable segment of the society that has walked into the twilight zone of their life has always challenged the economic acumen of the policy makers across all ecosystems.
Old Pension Scheme: (OPS)
India, being no exception got it’s fist pension scheme way back in 1924, when it was decided that individuals working in Govt sector, who have put in 10 years of service will be entitled to get pension from 58 years. The scheme, or OPS as we are wont to call it, was a defined one in the sense that the pensioner was supposed to get 50% of his last drawn salary. Employees of Government sector were not supposed to make any pre-defined contribution, nothing got deducted from his/her salary and was assured of a minimum payment till his/her death. It was decided that Govt will bear the entire cost which is incurred to meet this pension obligation. Interestingly, this pension scheme had two unique feature
- Dearness Relief (DR) whereby pension was subjected to an increase every two years in line with price hike/inflation. This measure neutralized the negative impact of inflation to a certain extent for the pensioners also who were otherwise entitled to get a fixed amount towards pension.
- GPF or General Provident Fund facility was made available to the Government employees whereby they were allowed to contribute a part of their salary every month in GPF. Corpus, accumulated thereof was made available to them on superannuation i.e on completion of their employment terms.
From the perspective of pensioners this scheme remained a much appreciated one for ages and justified the craze of Government jobs, despite salary difference with private sector for many years, in post independent India. The sense of emotional and socio-economic security which an assured payment brings in the twilight years of life was proved far more alluring that the fat pay package and glamour which private sector jobs otherwise offered in those days. Things, however changed with the realization that better and improved medical infrastructure has improved life expectancy and resulted in extended payout in long run. Number of pensioners started getting increased over the years and so did the liability of pension with Dearness Relief getting and upward hike every two years. Since there was no provision for creating a corpus and to grow it with a prudent investment strategy to meet this ever expanding financial liability it was found to be financially unsustainable.
Another major limitation of OPS was it’s restricted approach, which was confined to Govt sector employees. OPS never had any scope to incorporate the vast segment of the population who were engaged in unorganized sector. Finally, the Old Pension Scheme (OPS) was abandoned in the year 2004.
New Pension Scheme: (NPS)
Keeping these major limitations of OPS in mind, the Union Ministry of Social Justice and Empowerment commissioned a project- Old Age Social and Income Security (OASIS).
The primary objective of OASIS was to address the issue of economic security of unorganized sector workers in their old age.
The OASIS report, for the first time accepted and acknowledged the role of capital market as a money multiplier and recommended that individuals can judiciously take this route of investment in capital market through the designated scheme floated by professional funds manager. The investments were to be made in the form of Systematic Investment Plan (SIP).
Finally, based on the OASIS report New Pension Scheme (NPS) was launched in January,2004. It was a landmark step in the arena of Social Security System as for the first time in independent India a sincere and honest effort was made by the Government to ensure a steady income stream for the employees of unorganised sector, on completion of their employment.
NPS is implemented and regulated by PFRDA (Pension Fund Regulatory Authority of India) and the assets are managed by National Pension System Trust (NPSS). Any individual in the age group of 18-70 can subscribe to NPS and start contributing on an annual basis to build a corpus for his twilight years. On superannuation, 60% of the corpus can be withdrawn by the subscriber which is tax free. Remaining 40% is to be used for subscribing to superannuation fund managed by professional funds manager. NPS is open to subscription for individuals engaged in unorganised sector, corporate
Unified Pension Scheme (UPS):
The Unified Pension Scheme (UPS) is a new pension scheme introduced by the government in 2024. This scheme is a modified version of OPS as it offers a guaranteed pension, to all Central Government employees and can be extended to state government employees as well, subject to the State Government’s approval. Employees covered under the NPS can also opt for the UPS.
UPS guarantees a pension amount of 50% of the average basic pay over the last 12 months before retirement for employees with at least 25 years of service. A minimum pension amount of Rs. 10,000 per month is provided to employees with a minimum of 10 years of service upon superannuation. In case of the pensioner’s death, 60% of the pension amount, immediately before the retiree’s demise, will be given to her/his family.
Having highlighted the broad contours of the three pension policies, we had since ages ,it would be very interesting to delve little deep in their major differences and then draw a broad perspective regarding the subscription by individual entities.
Major differences and comparative evaluation:
1.Eligibility:
OPS and UPS are completely restricted to Government employees while NPS covers individuals across all sectors along with NRIs for subscription.
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Pension Amount:
UPS assures 50% of the average salary drawn by the Central Govt employees over the last 12 months before his superannuation. Also they should have 25 years of service and proportionate pension benefits for employees with 10-25 years of service.
OPS assures 50% of the last drawn salary and DA or average earning over the period of 10 months before retirement, whichever is higher.
NPS does not offer any assured return. Rather the return depends on the market performance and the value of the corpus accumulated from the subscriber contribution in the NPS investment scheme.
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Minimum pension amount :
An amount of Rs10000/- is assured under UPS to the Central Govt employees having 10 years of experience while the amount is 9000/- under OPS. However NPS does not have any such provision as the accumulation of corpus is subject to market performance.
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Family Pension:
UPS and OPS both have provision for family pension whereby pension is provided to the spouse of the retiree in case of death of the later. Family pension is computed at the rate 60% of the pension, last drawn by the retiree before his death. In case of NPS subscriber it depends on the annuity service provider and the scheme he/she opts for.
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Employee and Employer Contribution:
In case of UPS employer contribution is 18.5% of basic salary and employee contribution is 10% of basic salary while in NPS this figure is 14% and 10% respectively.
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Lump sum payment:
In case of UPS a lump sum amount is provided to the retiree on superannuation, which is 1/10th of their last drawn salary for every six months of completed service. NPS offers a provision of withdrawing 60% of NPS corpus as a lump sum upon superannuation.
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Inflation Protection:
UPS and OPS both offer an in-built protection mechanism against inflation as the pension amount is subjected to revision, every two years whereby the inflation gets factored in and the subscriber gets an upward revision. NPS, being market linked however does not offer any such scope.
Thus apparent evaluation of all three schemes indicates certain pronounced advantages in UPS and OPS which is completely lacking in NPS. The risk element is much higher in NPS as it is market linked. Concomitant absence of any assured return, and even any safeguard against inflation unlike UPS and OPS makes NPS a lackluster proposition.
However a careful evaluation of market return is imperative of the fact that equity as an asset class offers best returns in long run which is much higher than assured ones. As evident, risk always accompanies returns and bears a directly proportional correlation. NPS is certainly not an exception. Thus NPS is certainly a good option for those who have some insight into market dynamics and has age on their side. With a time horizon of 10-20 years NPS is an alluring option. However individuals having few years left to walk into sunset zone should opt for UPS considering the element of certainty and assurance embedded in it. An assured and defined return with adequate protection against inflation certainly acts as a feel good factor and brings an element of tranquility and composure in the twilight zone journey of the senior citizens.
