Explained: New Pension Scheme vs Old Pension Scheme controversy

With the assembly elections slated to be held in several states this year, one of the issues that the opposition has brought to the fore is the revival of the Old Pension Scheme. Here is a brief explainer into what the Old and the New Pension Schemes are and what role they may play in the upcoming assembly elections in certain states.

New Delhi:New Pension Scheme vs Old Pension scheme has become a controversial issue in recent days with some state governments promising their employees that they would return to the Old Pension Scheme, popularly known as OPS. This would mean trashing of the New Pension Scheme which was implemented for all those Central Government employees who entered the Central government’s service after January 1, 2004.

Unlike the Old Pension Scheme, where lifetime pension was guaranteed to Central government and State government employees post retirement without making any contribution to a corpus or pension fund, the New Pension Scheme is based on a voluntary contribution made by an employee under the National Pension System (NPS).

What is NPS?

Under the new system, an employee’s savings is invested into the funds managed by professional fund managers. These private fund managers are regulated by the pension sector regulator, the Pension Fund Regulation and Development Authority (PFRDA), into the approved instruments such as government bonds, corporate debt and stock instruments. These investment and saving instruments have good investment ratings and are considered safe so that an employee’s saving is available to him after retirement.

Under the NPS, there is an option for an employee to purchase a lifetime annuity from an approved life insurance company in addition to the option of withdrawing a lump-sum part from their corpus. The National Pension System was implemented to reduce the government’s ever increasing pension payment burden that was becoming unsustainable both for the Central and State governments.

Why do government employees demand a return to OPS?

However, in the recent years, both central and state government employees are demanding the return to the old pension scheme for all the employees -- both who joined the government services before January 1, 2004, and after that. As a result of this growing demand, several state governments have announced that they would return to the Old Pension Scheme. Opposition ruled states such as Rajasthan and Chhattisgarh have already announced their decision to return to the old pension scheme for all existing employees.

In the run up to the Gujarat assembly election, two opposition parties – the Congress and the Aam Aadmi Party -- promised the return of the Old Pension Scheme as a poll plank against the incumbent BJP government, taking it as an opportunity to capitalize on the demands by the state government employees. Similarly, in the hill state of Himachal Pradesh too, the Congress had promised to return to the Old Pension Scheme.

Is the investment into NPS safe?

The popular demand for return to the Old Pension Scheme has gained currency in the recent months as there is a feeling among the government employees that there could be risk to their lifetime savings if the PFRDA approved professional fund managers fail to secure the adequate returns in future. This will put their post retirement requirements at stake.

Crash of Adani Group stocks heightened concerns.

These concerns have been further aggravated with the crash of stock prices of Adani Group companies following the report of New York based short-seller Hindenburg. Following the release of a report by Hindenburg Research into the functioning of Adani Group companies, Adani lost half of the company's market valuation, from over Rs 19 lakh crore on January 24 to nearly Rs 9.5 lakh crore on Friday (February 10, 2023).

The crash in the market valuation of Adani Group companies prompted some opposition Chief Ministers such as Rajasthan chief minister Ashok Gehlot to reiterate his government’s decision to return to the Old Pension Scheme for the state government employees. Gehlot Saturday said his government would not leave the future of state government employees at the mercy of the stock market. Gehlot’s comment followed Prime Minister Narendra Modi’s advice to States to follow the path of fiscal prudence.

Now the challenge before the policy makers both at the Centre and States is to strike a balance between the need to secure the future of government employees with the resources available with both the Central and state governments as they are under increasing financial pressure to meet the rising pension bill.