Baba’s Explainer – Old Pension vs New Pension Scheme (NPS)

• Greater Life Expectancy: With the advancement of technology and healthcare, people would be living more and hence pension support would be required for survival.
• Burgeoning Old Population: As per a recent UN report, the share of older persons in India is projected to increase to nearly 20 per cent in 2050. This calls for giving due protection to them.
• Changing Family Structures: The breakup of joint family system and emergence of nuclear families has increased instances of abandonment of parents by children. In such times, the pension can give hope to survive and reduce the suicide rate among the elderly.
• Prevents Social Crisis: Schemes like Pradhan Mantri Kisan Maan Dhan Yojana (PMKMY) will help small and marginal farmers lead a dignified life in their elderly years by providing due financial support. If such support is not provided, then there would be instances like farmer suicides.
  • PMKMY is a pension scheme for small and marginal farmers having cultivable land up to 2 hectares. Farmers within the age group of 18-40 years are eligible to get themselves enrolled in the scheme. It aims at providing an assured pension of 3,000 rupees per month once the farmer attains the age of 60 years.

• Inadequate Coverage: A large part of the Indian population remains uncovered under any pension scheme. Those who remain uncovered usually belong to the unorganised sector.
• Inadequate amounts: For those persons who are covered under various pension schemes, the amount received is very meagre that is not sufficient for their sustenance.
  • The Parliamentary Standing Committee on Rural Development observed the meagre amount of assistance under the different components of the National Social Assistance Programme(NSAP). It ranged from 200-500 rupees per month.
• Inequitable Coverage: Furthermore, the benefits net of contributions and implicit rate of returns vary across programs, occupations, sectors etc. and thus the pension covers, in turn, become inequitable.
• Fiscal sustainability: The pension sector adds to the financial strain of the government’s fiscal plan. Many studies reveal that the volume of expenses against the payment of pensions is growing at a faster pace than that of the taxes and duties.
• Inefficient Administration: There is criticism regarding the delays in processing and crediting claims and in the issuance of annual statements. Organisational governance structure also needs improvement. Also, there is a lack of portability in retirement benefit systems across different sectors due to government rules and regulations.
• Investment policy: The government instruments where provident funds invest are not freely marketable and thus the rate settings are not market-based. This leads to a low real rate of returns.
• Poor Regulation: A weak regulatory and administrative mechanism is another serious problem that is reflected in the quality of service in the mandatory schemes.
  • CAG’s Performance Audit Report found that PFRDA did not fix timelines to upload legacy data and transfer of contributions to the Trustee Bank. This affects the timely transfer
  • Various ministries implementing pension schemes fail to constitute the Monitoring and Overseeing Committees. This will also result in poor implementation of pension schemes.
• Willingness to adopt: The citizens are not enthusiastic about voluntary pension schemes due to faulty design or lack of financial literacy. As per data on January 2020, no one has registered in the PMLVMY scheme from Mizoram and Lakshadweep.

• Pension to government employees at the Centre as well as states was fixed at 50 per cent of the last drawn basic pay.
• The attraction of the Old Pension Scheme or ‘OPS’ ay in its promise of an assured or ‘defined’ benefit to the retiree. It was hence described as a ‘Defined Benefit Scheme’.
• Also, like the salaries of government employees, the monthly payouts of pensioners also increased with hikes in dearness allowance or DA announced by the government for serving employees.
  • DA — calculated as a percentage of the basic salary — is a kind of adjustment the government offers its employees and pensioners to make up for the steady increase in the cost of living.
  • DA hikes are announced twice a year, generally in January and July.
  • A 4% DA hike would mean that a retiree with a pension of Rs 5,000 a month would see her monthly income rise to Rs 5,200 a month.
• As on date, the minimum pension paid by the government is Rs 9,000 a month, and the maximum is Rs 62,500.
• However, New Pension System (NPS) came into effect from Jan 2004 to address some of the issues with OPS and usher towards a modern Pension system.
• However, off late Political parties like Congress and AAP are promising to switch to the Old Pension Scheme. Such proposals, driven by short-term political considerations threaten to undo the hard-won policy gains that have been achieved through bipartisan consensus.

• Pension liability remained unfunded: There was no corpus specifically for pension, which would grow continuously and could add burden for government finances.
• Inter-generational equity issues: The present generation had to bear the continuously rising burden of pensioners.
• Unsustainable: Pension liabilities would keep climbing since pensioners’ benefits increased every year due to regular DA hikes. Also, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
• Huge Fiscal Burden: In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and the outgo for all states put together was Rs 3,131 crore. By 2020-21, the Centre’s bill had jumped 58 times to Rs 1,90,886 crore; for states, it had shot up 125 times to Rs 3,86,001 crore. Overall, pension payments by states comprise around 26 per cent of their own tax revenue.
• Bad Politics: Funding a small number of former government employees by utilising a chunk of taxpayers’ money cannot be good politics.

• The New Pension Scheme (NPS) for Central government employees was notified on December 22, 2003. It was originally conceived for unorganised sector workers, but was adopted by the government for its own employees.
• Unlike some other countries, the NPS was for prospective employees — it was made mandatory for all new recruits joining government service from January 1, 2004.
• The defined contribution comprised 10 per cent of the basic salary and dearness allowance by the employee and a matching contribution by the government — this was Tier 1, with contributions being mandatory.
• On March 21, 2005, the UPA government introduced a Bill in Lok Sabha to give statutory backing to the Pension Fund Regulatory and Development Authority of India (PFRDAI), the regulator for the NPS.
  • PFRDAI is the statutory Authority established by an enactment of the Parliament, working under the Ministry of Finance, to regulate, promote and ensure orderly growth of the NPS. It also administers Atal Pension Yojaya (APY)
• In January 2019, the government increased its contribution to 14 per cent of the basic salary and dearness allowance.
• Individuals can choose from a range of schemes from low risk to high risk, and pension fund managers promoted by public sector banks and financial institutions, as well as private companies.
  • 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.
• Over the last eight years, the NPS has built a robust subscriber base, and its assets under management have increased.
• As on October 31, 2022, the Central government had 23.3 lakh subscribers, states had 59 lakh subscribers, Corporate sector had 15,92,134 subscribers, and the unorganized sector 25,45,771.
• The total assets under management of all these subscribers stood at Rs 7,94,870 crore as on October 31, 2022.

• State governments can have some short-term gains i.e. they save money since they will not have to put the 10 per cent matching contribution towards employee pension funds.
• There is a demand from government employees too as OPS will result in higher take-home salaries. This is because they too will not set aside 10 per cent of their basic pay and dearness allowance towards pension funds.
• In the current environment, as parties in the Opposition space struggle to expand their reach, they may consider these moves as convenient.
• While there will be short-term gains for states, as pension liabilities increase over time, the space for more productive forms of expenditure will be curtailed.
• Rather than focusing on the immediate return and relief, political parties need to take a longer term view, and resist the temptation for such fiscally imprudent moves.

National Social Assistance Programme (NSAP)

Under NSAP, numerous pension schemes are there for the elderly, widows and disabled. These are:

• Indira Gandhi National Old Age Pension Scheme (IGNOAPS)
  • It was introduced in 1995 as a part of NSAP.
  • It aims at expanding the social safety net for the poor.
  • It is a non-contributory scheme and provides a monthly income for citizens or to refugees above 60 years, who have no other source of income.
  • Under this scheme, BPL persons aged 60 years or above are entitled to a monthly pension ranging from Rs. 600-1000 depending upon the state government’s share of the pension.
• Indira Gandhi National Widow Pension Scheme (IGNWPS)
  • The Government of India launched this scheme in February 2009.
  • Under this scheme, BPL widows in the age group of 40-64 years are provided with a pension of Rs. 600 per month.
• Indira Gandhi National Disability Pension Scheme (IGNDPS)
  • It was also launched in February 2009.
  • It provides pension to BPL persons with severe or multiple disabilities between the age group of 18-64 years.

Atal Pension Yojana (APY)

• It was launched in 2015.
• It aims at creating a universal social security system for all Indians, especially the poor, the underprivileged and the workers in the unorganised sector.
• It is open to all bank account holders in the age group of 18 to 40 years.
• APY is administered by Pension Fund Regulatory and Development Authority (PFRDA).

PM Kisan Maandhan Pension Scheme (PM-KMY)

• It is an old-age pension scheme for all landholding Small and Marginal Farmers (SMFs) in the country.
• It is effective from the 9th of August, 2019.
• It is a voluntary and contributory pension scheme for the entry age group of 18 to 40 years.
• The Life Insurance Corporation of India (LIC) is the Pension Fund Manager and is responsible for pension pay-out.

Pradhan Mantri Shram Yogi Maan-dhan Yojna (PM-SYM)

• This is a voluntary and contributory pension scheme.
• It is available to people engaged in the unorganised sector such as rickshaw pullers, street vendors, mid-day meal workers, head loaders, brick kiln workers, cobblers, rag pickers, domestic workers, washermen, home-based, agricultural workers, construction workers  or in similar other occupations.
• It seeks to provide old-age protection and social security to the above-mentioned occupational groups.
• The entry age for the beneficiary is 18-40 years and he/she should not be a member of ESIC/EPFO or an income taxpayer.
• The Life Insurance Corporation of India (LIC) is the Fund Manager and is responsible for pension pay-out.