Why is it in the News?

Recently, the RBI released a report saying, the return to the Old Pension Scheme (OPS) by a few states would put a huge burden on their finances, restricting them from undertaking capital expenditure to drive the growth.

What is the Old Pension Scheme (OPS)?

• The Old Pension Scheme (OPS), popularly OPS, is for state and central government employees who have completed 10 or more years of service.
• The appeal of the Old Pension Scheme lies in its commitment to provide a guaranteed or 'defined' benefit to retirees, classifying it as a 'Defined Benefit Scheme.'
• It provides government employees with pensions based on their final salary, amounting to 50% of the last drawn salary.
• For instance, if a government employee's final monthly salary upon retirement was Rs 10,000, they would receive a guaranteed pension of Rs 5,000.
• Similar to government employees' salaries, pension payouts increased with government-declared dearness allowance (DA) hikes.
• The Central government discontinued OPS in 2003.

What were the issues with the OPS?

• The primary concern was the unfunded nature of the pension liability, lacking a dedicated corpus that could grow over time to meet payment needs.
• The annual Government of India budget allocated funds for pensions without a clear strategy for sustaining future payments.
• The 'pay-as-you-go' approach raised inter-generational equity concerns, burdening the present generation with the escalating load of pension responsibilities.
• Recently, the RBI expressed alarm over some states, including Himachal Pradesh, Jharkhand, Punjab, Chhattisgarh, and Rajasthan, reverting to the OPS, citing it as a significant fiscal challenge.
• The RBI warned that by deferring current expenses to the future, states risk accumulating unfunded pension liabilities in the years to come.

What is the New Pension Scheme (NPS)?

• Introduced by the Central government in 2004 as an alternative to OPS, NPS is accessible to employees across public, private, and unorganized sectors, excluding those in the armed forces.
• This pension initiative encourages individuals to invest in a pension account regularly during their employment.
• Upon retirement, subscribers can withdraw a specific percentage of the accumulated corpus.
• The remaining amount is disbursed as a monthly pension post-retirement.
• Regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

How does NPS differ from OPS?

• Old Pension Scheme (OPS) ensures a fixed and guaranteed pension amount.
• In contrast, the National Pension Scheme (NPS) is an investment-cum-pension scheme, exposing returns to market volatility.
• NPS contributions are defined, but benefits are contingent on market performance.