Indian Pension System- Significance and Challenges- Explained Pointwise

Indian pension system has evolved through three key phases- from the the Old Pension Scheme (OPS), to the New Pension Scheme (NPS), and to the proposed Unified Pension Scheme (UPS). Each pension scheme marks a shift in policy and impacts retirees differently.

The OPS was considered more secure, while the NPS tied retirement funds to market fluctuations. However, amid a global retreat from neoliberalism, India has re-examined its approach to pension schemes and has come up with the Unified Pension Scheme (UPS).

What are the different Pension Schemes introduced in India? What are their provisions?

What were the concerns with the Old Pension Scheme which led to the introduction of the NPS?

1. Limited Coverage of the Old Pension Scheme(OPS)- The Old Pension Scheme(OPS) covered only the government employees, which formed ~12% of the total workforce of the country. National Pension Scheme aim was to provide pension coverage to even the workers of the unorganised sector. Workers of the unorganised sector could also join the NPS voluntarily.

2. Huge Fiscal burden on the Central and State Governments due to OPS- With every new pay commission awards, the basic salaries of the Government servants were increasing. This was increasing the burden on the Union and state exchequers in making pension payments under OPS scheme.
For instance- According to the India Pension Research Foundation, the expenditure on Union civil service pensions was around be 2.31% of the GDP in 2004-05 and the implicit pension debt of the Government of India was around 56% of the GDP.

3. Burden on the future Generation due to OPS- Under the OPS Scheme, contributions of the current generation of workers were explicitly used to pay the pensions of pensioners. Hence, OPS scheme involved direct transfer of resources from the current generation of taxpayers to fund the pensioners.

4. Disincentivised Early Retirement- The OPS scheme used to disincentivise early retirement, as the pension was fixed at 50% of the last drawn salary. Hence, even the disinterested government employees used to linger around to reach till their retirement age to avail maximum pension. This resulted in massive under utilisation of human resources.

What advantages were sought by the introduction of NPS?

1. Flexibility- NPS allowed the subscriber to choose the fund manager and the preferred investment option, including a 100% government bond option. A guaranteed return option could also be considered to provide an assured annuity.

2. Simplicity and portability- Opening of account with NPS provided a Permanent Retirement Account Number (PRAN) which remained valid throughout the lifetime of the subscriber. The NPS is also portable across jobs, as PRAN account remains the same.

3. Well Regulated Scheme- An NPS Trust was also constituted to regularly oversee performance of fund managers, with a trustee bank to efficiently manage fund flows. A custodian was also appointed to hold the securities, with subscribers being beneficial owners of the assets.

What were the issues with the introduction of NPS?

1. Market Volatility/Uncertainty- Contributions under the NPS scheme were invested in the markets through the fund managers. There were apprehensions that the new NPS will not deliver the same benefits as the old scheme. The returns were prone to the market volatility and uncertainty.
As per SBI report, NPS asset growth has been affected by the Ukraine-Russia conflict and may fall short of the declared target of Rs 7.5 lakh crore by March 2022.

2. Increased burden on Employees- Under the old pension scheme, all the burden of pension was borne by the government. There was no requirement of monthly contribution from employees in the pension fund. Hence, the employees used to get greater disposable monthly income in their hands along with an assurity of pension.
NPS had decreased the disposable monthly income in the employees hands as 10% of their basic pay and DA is deducted every month.

3. No General Provident Fund (GPF) benefits- Under the Old Pension Scheme (OPS), fixed returns were guaranteed for employee contribution to the General Provident Fund (GPF). However, NPS had no General Provident Fund (GPF) provisions.

4. No assured Family Pension- There were no provisions for assured family pension in the NPS, unlike the OPS. The pension was dependent on the pension corpus.

5. No indexation for Inflation- The NPS lacked any indexation to account for inflation. The pension was entirely market linked.

What is the Significance of the Unified Pension Scheme?

1. Assured Pension- UPS provides a fixed, assured pension amount, unlike the market-linked returns of the NPS.
Employees who have served for at least 25 years will receive 50% of their last drawn salary from the previous 12 months as pension.

2. Higher Government Contribution-  The government’s contribution rate in UPS is 18.5%, which is higher than the 14% in NPS. This increased contribution can significantly boost the pension corpus, providing greater financial security in retirement.

3. Inflation Indexation- Employees who have served for over 25 years will be eligible for post-retirement inflation-linked increments to their pension. This protects the real value of the pension against rising prices.

4. Assured Family Pension- UPS includes an assured family pension of 60% of the employee’s basic pay, payable to dependents upon the employee’s death.

5. Combination of Defined Benefits and Contributions- UPS blends the guaranteed pension features of OPS with the investment flexibility and portability of NPS. This balanced approach offers both stability and growth potential for retirement benefits.

What are the Concerns with the Unified Pension Scheme?

1. Increased Fiscal Burden- The introduction of a defined pension could significantly increase the financial burden on the government. For ex- The expenditure on arrears will be Rs 800 crore in the first year of implementation, and would cost the exchequer roughly Rs 6,250 crore.

2. Potential for Unsustainable Liabilities- As the UPS combines features of both the Old Pension Scheme (OPS) and the National Pension System (NPS), there is concern that it may lead to unsustainable liabilities for the government. The defined benefits could constrain spending on other essential services, as a larger portion of the budget may need to be allocated to cover pension costs.

3. Inequitable Benefits- The scheme primarily benefits a small section of the workforce, the central government employees. While the NPS was voluntary for the workforce in the unorganized sector, there are no such provisions in the UPS.

4. Transition from NPS- This transition raises questions about the management of the existing NPS corpus and the potential for reduced participation in the NPS.

5. Concerns of lower returns- Critics argue it offers lower returns compared to the OPS and leaves retirees vulnerable to market risks. There are concerns about underfunding which may lead to delayed payouts.

6. Disadvantegeous for late joiners- The requirement of 25 years of service for a full pension under UPS is disadvantageous for late joiners.

7. Exclusionary- The UPS currently covers only Union government employees, and excludes many public sector workers, which may hinder further pay commissions.

What is the comparative analysis of the three pension schemes?

What Should be the Way Forward?

1. Inclusion of informal labor under UPS- The government should focus on increasing the government’s contribution and expanding the scheme to include informal labor. UPS must broaden its scope to provide pension security for all citizens, not just government employees.

2. Regular Assessments- Periodic evaluations should be conducted to ensure that the scheme remains financially viable. The government contributions should be adjusted based on these assessments to maintain a balance between employee benefits and fiscal responsibility.

3. Stakeholder Consultations- There must be regular engagement with government employees, unions, and other stakeholders to gather feedback and address concerns regarding the UPS. This can help in refining the scheme.

4. Performance Metrics- The government should aim to establish clear performance metrics to evaluate the effectiveness of the UPS in meeting its objectives. Regular monitoring can help in making informed decisions about necessary adjustments to the scheme.

A restructured UPS could offer a balance between state responsibility and market participation, protecting retirees from market risks while ensuring a robust welfare system.