The pension conundrum

With India’s population ageing rapidly, pension is becoming a core political issue. As a result, the Old Pension Scheme (OPS), New Pension Scheme (NPS), Employees Pension Scheme, 1995 (EPS-95), and the Unified Pension Scheme (UPS) have arrived.

To restate the timelines, the OPS, a ‘defined benefit’ scheme, was replaced by the NPS, a ‘defined contribution’ scheme, on January 1, 2004, while an NPS version will morph into the UPS, effective April 1, 2025. The UPS will cater to 68 lakh central government pensioners from civil services, defence, telecom, postal, and railways, while state governments will decide on pension schemes for their employees.

This will still leave out 78 lakh workers in the organised sector covered under the EPS-95, with their own set of grievances, from the government plans. This also leaves out lakhs of corporate employees and unorganised workers forced to navigate an NPS criticised by government employees.

Effective January 2004, government employees -- except armed forces personnel -- were mandated to join the NPS, contributing 10% of their basic salary plus dearness allowance to the employee’s pension fund. The government contributed an equal amount.

Private sector employee contribution to NPS is voluntary; the employer’s contribution is optional. Public sector units like BEML, factories, and other establishments with organised sector workers fall under the EPS-95 pension scheme.

Ahead of Assembly polls, the Opposition campaigned to abolish the NPS and a return to the OPS, while some opposition-ruled states actually implemented the OPS in 2022–23. Under the OPS, employees do not contribute to their pension funds but receive 50% of their last drawn salary plus DA upon retirement.

Their pensions are indexed to inflation, increasing with dearness relief at regular intervals. In contrast, NPS pensioners face market-based outcomes with their retirement corpus subject to inflation and price hikes. Naturally, employees prefer the OPS, a defined benefit scheme, over the market-related risks and uncertain returns of the NPS corpus, where they fund their “pensions” themselves and annuities are not indexed to inflation.

However, continuing the OPS spells disaster for government budgets. Over three decades, the Centre’s pension bill has jumped 58 times, and the states’ pension bill shot up 125 times. Today, more people draw pensions from the central government than the number of active service employees—a situation that is clearly unsustainable.

India’s demographic dividend is being frittered away, with today’s youth financing old-age pensions, including 6-7,000 centenarian pensioners. Today’s tax payers are financing current pensioners. With declining fertility rates, there soon won’t be enough workers to finance the pensions of retirees. This undoubtedly creates a recipe for bankruptcy, diverting resources from development, welfare, and infrastructural growth that could benefit all citizens, not just central government employees. 

With the NPS drawing cudgels, the government shifted its approach towards the old age income security of central government employees by shifting to the UPS, which retains a key ‘defined contribution’ feature of the NPS and provides for an assured guaranteed minimum pension.

A hedge against inflation is incorporated, and the pension income will rise whenever the consumer price trend of industrial workers does. Now who pays for dearness hikes and the cost of assured pensions, which now become the government’s committed expenditure?

UPS pensioners remain unhappy over the contributory aspect of the UPS and the lack of a commutation option. 

The EPS pensioners are unhappier; they yearned for a similar combination of the OPS and NPS schemes. Their existing rate of return as a percentage of pension paid is less than prevailing bank rates. A hike in their Rs 1,000 minimum pension is a tenth of the UPS-guaranteed Rs 10,000 minimum with a mere 10 years of central government service.

Anticipated following the Supreme Court’s November 1992 judgement was a pension on higher wages, even if it exceeded the PF ceiling. In response, the EPF body cites cash flow issues and non-sustainability of pension funds, unfairly pushing pensioners and employers to submit very old documents to establish eligibility.

In sum, everyone seems unhappy with the current pension landscape. An unviable OPS, a flawed NPS, a UPS facing criticism, and EPS pensioners yearning for a UPS-NPS hybrid scheme—all while corporate pensioners, private sector employees, and unorganised workers struggle with the NPS. The dignity and financial security of elderly Indians are at stake. The government must avoid being swayed by electoral considerations and focus on solutions that serve all citizens, not just government employees. Whether the UPS, the government’s latest scheme, will improve upon the NPS or mark a step backward in pension reform, only time will tell.

(The writer is former Executive Director and Member, Board of Directors, BEML)