Old Pension Scheme

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Context:

Congress has already reverted to the Old Pension Scheme in Rajasthan and Chhattisgarh, and AAP has said it would do the same in Punjab.

Relevance:

GS II: Polity and Governance

Dimensions of the Article:

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’ — called so since it existed before a new pension system came into effect for those joining government service from January 1, 2004 — lay in its promise of an assured or ‘defined’ benefit to the retiree.
It was hence described as a ‘Defined Benefit Scheme’.
- To illustrate, if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000.
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 per cent 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 (50 per cent of the highest pay in the Central government, which is Rs 1,25,000 a month).

There was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
The Government of India budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.
The government estimated payments to retirees ahead of the Budget every year, and the present generation of taxpayers paid for all pensioners as on date.
The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.

For one, pension liabilities would keep climbing since pensioners’ benefits increased every year; like salaries of existing employees, pensioners gained from indexation, or what is called ‘dearness relief’ (the same as dearness allowance for existing employees).
And two, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
Over the last three decades, pension liabilities for the Centre and states have jumped manifold.
- 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.

The New Pension System proposed by the Project OASIS report became the basis for pension reforms — and what was originally conceived for unorganised sector workers, was adopted by the government for its own employees.
The New Pension Scheme (NPS) for Central government employees was notified on December 22, 2003.
- 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.
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.

-Source: Indian Express