Comparison of National Pension Scheme with Old Pension System – Explained, pointwise

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The National Pension Scheme (NPS) was introduced on January 1, 2004 for all employees of the Union Government appointed on or after this date. Most State governments also adopted this scheme for their staff. However, some states are having a re-think and planning to revert to the old pension scheme, which is an unfunded ‘pay as you go’ scheme. Rajasthan and Chhattisgarh have already reverted to the old pension scheme. Some political parties are demanding the same in Madhya Pradesh, Assam, Himachal Pradesh and Telangana.

What was the old pension ‘Pay As You Go’ (PAYG) scheme?

Prior to 2004, India had the PAYG plan where the beneficiaries decided how much they wanted to contribute either by having the specified amount regularly deducted or by contributing a lump sum amount. Under this, the entire pension amount was borne by the government while fixed returns were guaranteed for employee contribution to the General Provident Fund (GPF). Governments paid 50% of the last drawn salary plus DA as pension to employees after retiring, and half of that to their eligible dependent family members in case of death. Minimum pension was Rs 9,000.

What is the National Pension Scheme (NPS)?

The PFRDA Act of 2013 defines the NPS as a contributory pension scheme whereby contribution from a subscriber and a matching contribution from the government is collected and accumulated in an individual account.

The proposal to move from the defined benefit scheme (DB) to a defined contribution scheme (DC) had been under consideration of the Government since the mid-1990s. NPS was introduced in 2004 and made mandatory for central government employees as well as staff of those state governments which adopted this scheme. However, It is voluntary for the workforce in the unorganized sector. At present, 10% of basic pay and dearness allowance (DA) is deducted as a voluntary contribution towards it.

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What is the current status of National Pension Scheme?

All states have migrated to the NPS, except for West Bengal and Tamil Nadu since adoption had to be done on a voluntary basis. However, Rajasthan and Chhattisgarh have moved back to the old scheme recently.

As per SBI report, there are around 55 lakh state government employees enrolled in NPS as of now. It further noted that the yearly contribution of the state government employees is in excess of Rs 2.5 lakh crore for this financial year.

However, it says that asset growth has been affected by the Ukraine-Russia conflict and may fall short of the Rs 7.5 lakh crore declared target by March 2022 this year.

Why did the government introduce National Pension Scheme?

Coverage: The older pension schemes covered only around 12% of the total workforce, leaving nearly 88% of workers without any pension coverage.

Fiscal Burden: The PAYG scheme was proving too expensive and there were apprehensions that it would sooner than later become fiscally unsustainable. The Fifth Pay Commission (2006) gave a liberal award which further increased expenditure on pensions. Since most state governments also adopt a similar salary and pension structure, state finances also come under stress. The expenditure on Union civil service pensions was estimated to be 2.31% of the GDP in 2004-05. Economists at the India Pension Research Foundation estimated (in 2005) that the implicit pension debt of the Government of India worked out to about 56% of the GDP. In other words, PAYG would have become fiscally unsustainable for the Governments.

Future Commitments: It was felt that pension liabilities of the governments will go up even more in future. This would happen due to improvement in life expectancy, periodical additions to dearness allowance and linking of pension to prevailing levels of salaries. Moreover, many economists have criticized the PAYG scheme as putting the burden on future generation because under PAYG, contributions of the current generation of workers were explicitly used to pay the pensions of pensioners. Hence, a PAYG scheme involved direct transfer of resources from the current generation of tax payers to fund the pensioners.

Disincentivize Early Retirement: The old scheme used to incentivize early retirement as the pension was fixed at the last drawn salary. This early retirement resulted in under-utilization of human resources by the government.  

How does NPS ensure safety and security of employees’ contribution?

NPS is so designed that a subscriber can ensure that her investment is safe and secure.

The contributions to the NPS are managed by professional fund managers like the LIC, ICICI etc.  The fund managers are selected through a transparent and competitive processNPS allows the subscriber to choose her fund manager and her preferred investment option including a 100% government bond option. A guaranteed return option could also be considered to provide an assured annuity. 

An NPS Trust has also been constituted to regularly oversee performance of fund managers with a trustee bank to efficiently manage fund flows. A custodian has also been appointed to hold the securities with subscribers being beneficial owners of the assets. 

This arrangement has been working well for over a decade now.

Why are some States switching to the old pension model?

Market Uncertainty: There is an apprehension in certain sections of the staff that the new NPS will not deliver the same benefits as the old scheme. They believe that their money will not be safe in the hands of fund managers considering the market uncertainty and they might get a very low amount of pension.

Growing Resentment: There has been a constant demand from those who joined government services that the ‘contributory pension’ scheme introduced in 2004 be reversed to the ‘defined pension’ scheme. Resentment against the new scheme has been simmering and breaks out in mass protests now and then.

Reducing burden on Employees: Under the old scheme, all the burden is being borne by the government and employees get greater disposable income in their hands along with an assurity of pension.

Attracting Good Talent: The uncertainty regarding NPS may discourage many talented youth to enter into the government sector considering a rise in salaries and other benefits offered by the private sector in the future.

Populist measure: Some experts are calling it a populist measure as employees are a very vocal and an important pressure group. They are also the people who implement government policies and programmes, and widespread disgruntlement amongst them can have an adverse impact on the outcomes. 

What should be done?

First, Considering the non viability of old pension schemes, a former Union Finance Secretary has recommended that the government should design an ‘assured pension’ scheme. This should combine elements of both the defined and the contributory pension schemes. 

Second, the future pay commissions should move towards the concept of “cost to company” (C-to-C) and include the cost of assured pension while determining pay revisions. 

Third, the government should also revisit the structure of the civil services to ensure that the organizations don’t become ‘top heavy’ over time, as they have now.

Fourth, until a new scheme is created, focus should be on reforming the NPS as per CAG 2018 recommendations: (a) A foolproof system needs to be put in place to ensure all nodal offices and eligible employees are registered under NPS; (b) Delays need to be penalized and compensation affected to avoid loss to the subscriber, (c) Government to ensure that rules on the service matters are in place for the government NPS subscribers.


The experience so far has been that NPS has given good returns and many experts believe that the annuity is likely to be as attractive as in the old pension scheme, if not better. However, another set of experts criticize NPS due to its uncertainty. There is no doubt that old pension system will prove to be fiscally unsustainable. Thus current scenario warrants reforming NPS and providing a greater degree of assurance to the subscribers.

Source: The Times of India, The Times of India, The Times of India

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