Pension is my earned money, not from tax kitty

The powers that be seem to have a penchant for acronyms: OPS, NPS, and now UPS. When the New Pension Scheme (NPS) was introduced in 2004, the existing pension came to be referred to as the ‘Old Pension Scheme’ (OPS). Before NPS, the term ‘pension’ had no prefix like
old or suffix like scheme attached to it.

Partially bowing to pressure from employees clamouring for the restoration of OPS, the central government has now proposed a hybrid model named the Unified Pension Scheme (UPS) for central government employees, effective from April 1, 2025. State governments will likely follow suit, either by reverting to OPS or adopting UPS, to appease their state employees.

As UPS is designed to offer more advantageous pensions to central government employees, there has been an outcry on social media against this perceived largesse. Detractors argue that taxpayers’ money should not be used to provide larger pensions to an already well-off segment.

It is a misconception that pensions under OPS are paid out of tax revenue. Pensions were not paid from government coffers; instead, they were disbursed from pension funds, which were created over time through provisioning. I joined a public sector bank in 1984 and have been receiving pension since my retirement in 2019 through the bank’s Pension Fund. Let me explain how the ‘OPS’ worked using the PSB’s example. 

The PSB I worked in since 1984 had a straightforward formula for making pension provisions under what is now called the Old Pension Scheme. When paying monthly salaries, the employer bank set aside 10% of basic pay as provision for pension. The total salary (consisting of basic pay and allowances) plus the pension provision (10% of basic pay) was debited to the ‘Expenses Account’ under ‘Salary and Allowances’ each month. While the salary was credited to employees’ accounts, the pension provision was credited to a common pool known as the Pension Fund.

The employer bank was fully aware of the monthly cost of employing each staff member. In percentage terms, the bank paid Rs 100 (plus other allowances) in cash to the employee and kept Rs 10 each for provision towards pension. The total cost to the bank was 110% of pay, besides perks, paid to employees. In other words, when the employer bank hired an employee with a monthly cost to company (CTC) of Rs 110, the amount was split between Rs 100 for pay and Rs 10 as a pension provision. Employees earned Rs 110, out of which the payment of Rs 10 was deferred to be paid as a monthly pension after retirement. There is a concept of cost to company, which includes salary, all the other perks, and provisions made by the employer. That is also called the salary package.

Provisions for pension under the Old Pension Scheme were made out of the monthly outlay for an employee from the very beginning.

The liability of pension payments doesn’t arise out of the blue at the time of an employee’s retirement. The payment of pension is not dependent upon tax revenues. Rather, pensioners pay income
tax on the pensions they receive. Pension is nothing but deferred payment of part of their monthly dues, which they forgo from the beginning during the service period. Pension is ‘earned’; it is not a ‘freebie’.

Let it be clear that all those who are getting pensions from the old pension system are getting them out of provisions made from monthly payouts earmarked for employees. A pension is not a contingent financial burden to be borne out of tax revenues. Employers giving pensions to their employees, whether governments or others, make provisions every month at the time salaries are disbursed to the employees.

The provisions for pensions, entrusted to pension funds, are invested for attractive returns. Pensions are paid out of accumulated planned provisions. Had the provision part been paid to employees with monthly salaries,
there would have been no pension. It has been a discreet policy of employers to keep away a certain percentage of employees’ pay for payment as pension.

I just wonder why the New Pension Scheme was introduced in the first place. And when it was found that resentment was brewing against NPS, the government should have reverted to the old pension system instead of coining a complex concept by the name of the Unified Pension System.