NPS vs OPS: Will Budget 2024 settle the debate in an election year?

Will clarity over NPS-OPS debate emerge during the Budget session?

If not on February 1, when Finance Minister Nirmala Sitharaman presents the interim budget, the Budget session might see the government giving a big nudge to central government employees to stick with the National Pension System (new pension scheme). For now, all eyes are on Sitharaman’s Budget speech to see if she chooses to address the issue on February 1.

Word on the street is that the report of the Finance Secretary TV Somanathan-headed committee to address government employees’ concerns around the NPS for this class of individuals will be out during the Budget session. At the heart of the issue is how to make the NPS more appealing to those who were used to receiving a guaranteed pension through the Old Pension Scheme (OPS).

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The central government would want to address this contentious issue before the general elections in April and May. The NPS-OPS debate had attracted a lot of attention ahead of state elections in November 2023, with Congress-ruled states promising to restore the OPS. The erstwhile governments of Chattisgarh and Rajasthan, besides the current government of Punjab, were contemplating a switch back to the OPS, which offers defined pensions to government employees.

“From what we have heard, the government could evaluate a proposed middle path, where it agrees to step in if the government employee’s annuity income (through NPS) at retirement were to fall short of 50 percent of the last drawn salary,” said a senior official at an NPS asset management company, speaking on the condition of anonymity.

NPS vs OPS: How the arguments stack up

Why the demand for OPS restoration resonates

Pension payouts for central government employees who joined the workforce before January 1, 2004, are managed under the OPS.

The formula for pension payout is fixed — 50 percent of the last drawn basic pay plus dearness allowance at retirement or average emoluments earned in the last 10 months of service, whichever is higher. The employee should have completed at least 10 years of service. Family pension is paid out to family members of the deceased pensioners.

Given the assured payouts and the fact that no deduction towards pension was made from their salaries and financial security offered to their families after their deaths, OPS was a popular scheme. It is not surprising that many employees favour the restoration of the old framework.

The Reserve Bank of India (RBI) in a paper titled 'Fiscal Cost of Reverting to the Old Pension Scheme by the Indian States – An Assessment' had termed a shift back to OPS "fiscally unsustainable" and a "major step backwards.

"…short-run reduction in states' pension outgo, which may be driving decisions to restore OPS, would be eclipsed by the huge rise in future unfunded pension liabilities in the long run. States' reverting to the OPS would be a major step backwards and can increase their fiscal stress to unsustainable levels in the medium to long term," the RBI had said in its bulletin in September 2023.

The Pension Fund Regulatory and Development Authority (PFRDA) chairman Deepak Mohanty, too, has flagged the unsustainability of "unfunded pension schemes" such as OPS.

NPS, the market-linked, defined contribution framework

The NPS was introduced for government employees (except armed forces) who joined the workforce after January 1, 2004. Subsequently, most state governments switched to the new system as the growing pension liabilities were seen as unsustainable beyond a point.

Unlike OPS, NPS is a defined contribution (and not defined benefit) scheme where the employee contributes 10 percent of the basic salary and dearness allowance, and the employer (government in this case) contributes up to 14 percent of the basic pay to the employee’s NPS corpus.

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The final lumpsum corpus and annuity or pension income are market-linked. This is the cause of concern for many government employees, many of whom prefer the government-backed guarantee in the case of OPS.