Pension Scheme: What to Choose for a Secured Future?

As the workforce landscape continues to evolve, the debate over the old and new pension schemes has intensified. With the new pension scheme touted as a game-changer, examining the differences between the two systems and their impact on citizens is imperative.

Old Pension Scheme: A Recap

The old pension scheme was introduced in 1995 and is also known as the Defined Benefit Pension Scheme. Under this scheme, government employees are entitled to a pension that is calculated based on their last salary drawn and the number of years of service.

The pension amount is guaranteed and fixed, and employees are also entitled to other benefits such as medical facilities and gratuity. However, the scheme is only available to government employees. The total number of OPS subscribers stood at 7.5 crore, with a pension payout of ₹1.20 lakh crore in the financial year 2022-23.

New Pension Scheme: An Overview

On the other hand, the new pension scheme, also known as the National Pension Scheme (NPS), was introduced in 2004 and is available to government and private sector employees. This scheme is based on the Defined Contribution Pension Scheme, where individuals contribute a fixed amount to their pension account. 

Under this scheme, employees are required to contribute a minimum of 10% of their basic salary to the scheme, while the government contributes an equal amount. The contributions are invested in a variety of instruments, including equities, bonds, and government securities, among others. Upon retirement, the employee can withdraw up to 60% of the accumulated corpus, while the remaining 40% must be used to purchase an annuity that will provide a regular pension. This scheme is also portable, meaning that individuals can continue contributing to their pension account even if they change their job or employer.

According to the data from the Pension Fund Regulatory and Development Authority (PFRDA), as of March 2023, there are around 6.5 crore subscribers under the NPS scheme in 2022, with a total asset under management of ₹5.5 lakh crore. The PFRDA also reported that the scheme had generated an average annual return of 10.5% over the past five years. The scheme has grown significantly over the years, and many people are opting for this scheme due to its flexibility and portability.

OPS vs. NPS: A Comparison

The NPS operates on the 'contribute-as-you-earn' system, where the employee and employer contributions to the pension fund. The scheme's primary investment choices include equity, corporate bonds, and government securities. The NPS provides a wide range of investment options, which can be tailored to suit individual risk profiles.

In contrast, the OPS is a defined benefit pension scheme where the pension amount is fixed based on the number of years of service and the last drawn salary. The pension scheme is funded by the government, and the employees need not contribute to the pension fund.

One of the major advantages of the new pension scheme is that individuals have more control over their pension funds. They can choose their investment options based on their risk appetite and investment goals. The scheme also allows individuals to switch their investment options as per their changing needs. Moreover, the scheme provides a tax benefit under Section 80CCD (1B) of the Income Tax Act, 1961, which allows individuals to claim an additional deduction of up to ₹50,000 from their taxable income.

However, the new pension scheme has its own drawbacks. The pension amount is not guaranteed and is subject to market risks. The investment returns depend on the performance of the market, and there is no guarantee that individuals will receive the expected returns. Moreover, unlike the old pension scheme, the scheme does not provide any medical or other benefits.

Meanwhile, the OPS has also been deemed unsustainable for the government. Jitendra Singh, the MoS for the Ministry of Personnel, stated in an interview with The Hindu that more people receive pensions from the central government than there are active workers. "There are about 77 lakh pensioners while active-duty personnel are numbered between 50 and 60 lakh,"

The government argues growth in the senior population and their life expectancy equals an increase in the government's financial liabilities. The increase is two-fold since pensioners' benefits, like existing employees' salaries, grow every year because they are adjusted for dearness allowance. This imposes a significant financial burden on the government.

Declining Subscribers for NPS

Between April and November 2022, the number of new subscribers incorporated by state governments under the programme dropped by 11% to a four-year low. According to the NSO report, only 2,85,226 new state government employees joined the NPS from April to November, a decrease from the 3,21,225 subscribers during the same time last year.

This year, the lowest amount of fresh state government subscribers since FY19 have joined the programme. The NSO began releasing the monthly NPS data as a gauge of the creation of employment opportunities in the formal sector starting in FY19. Previously, Covid stuck during the April-November time frame of FY21, when there were fewer subscribers (2,25,652).

In an interview with Business Standard, Mukesh Anand, assistant professor at the National Institute of Public Finance and Policy, stated that the reduction in the number of new subscribers is caused by some states' decision to switch back to the Old Pension Scheme (OPS). Additionally, it is a result of the decline in public-sector hiring.

What to Choose?

According to experts, individuals should choose a pension scheme based on their risk appetite and retirement goals. The old pension scheme is a better option if individuals are risk-averse and prefer a guaranteed pension amount. 

However, the new pension scheme is a better option if individuals are willing to take risks and want more control over their pension funds. Some experts believe the old pension scheme is still the better option, particularly for employees who plan to work for the government for a long time.

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