NATIONAL PENSION SCHEME - GOVERNANCE

NATIONAL PENSION SCHEME - GOVERNANCE

News: Some States lagging behind on NPS dues, Centre tells RS

 

What's in the news?

●       Some States are falling behind in making contributions towards their employees’ retirement savings under the New Pension Scheme, the Finance Ministry flagged “an increasing divergence of practices between different State Governments” in the way they handle pension obligations for staff recruited after 2004.

 

National Pension Scheme:

●       The Atal Bihari Vajpayee government in 2003 decided to discontinue the OPS and introduced the NPS.

●       The scheme, applicable to all new recruits joining Central Government service (except the Armed Forces) from April 1, 2004, is a participatory scheme, where employees contribute to pension corpus from their salaries, with matching contribution from the government, and is market-linked.

●       Except West Bengal, all States implemented the NPS.

●       Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh have informed the Pension Fund Regulatory and Development Authority, which administers the NPS, about their decision to restart the OPS for their State employees and have requested a refund of the corpus accumulated under NPS.

●       Till February, there were 22.74 lakh Central government employees and 55.44 lakh State government employees enrolled under the NPS.

 

Features of NPS:

●       It is a scheme, where employees contribute to their pension corpus from their salaries, with matching contributions from the government.

●       The funds are invested in earmarked investment schemes through Pension Fund Managers.

●       At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed.

●       It can have two components - Tier I and II.

●       Tier-II is a voluntary savings account that offers flexibility in terms of withdrawal, and one can withdraw at any point of time, unlike Tier I account.

●       Private individuals can opt for the scheme.

 

Old Pension Scheme

New Pensions Scheme

  1. Defined pension scheme
  2. No need of contributions from employees
  3. Pension is based on the last drawn salary and length of service.
  4. Upon retirement, employees receive 50% of their last drawn basic pay and dearness allowances or their average earnings in the last ten months of service, whichever is more advantageous to them.
  5. Entire expenditure under OPS was borne by the government.
  6. Only government employees were eligible for OPS
  1. Contributory pension scheme
  2. Employer and employee contribute their respective shares
    1. Employee’s contribution is 10% of their basic salary
    2. The government’s contribution is 14%
  3. NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA)
  4. National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.
  5. NPS id market based returns over long term
  6. It not only covers government employees but also covers private sector employees.
  7. Age limit: 18 years to 70 years
  8. The funds are then invested in earmarked investment schemes through Pension Fund Managers.
  9. Schemes under the NPS are offered by nine pension fund managers
    1. It is sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Adita Birla, Tata, and Max.
  10. At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed.

 

Old Pension Scheme or Defined Pension Scheme:

●       The scheme assures life-long income, post-retirement, usually the assured amount is equivalent to 50% of the last drawn salary.

●       The Government bears the expenditure incurred on the pension. The scheme was discontinued in 2004.

 

Issues of Old Pension Scheme:

●       Economists say the issue is simple - longer lifespans meaning more pension payout.

●       For instance, employees retiring at 60 and having an average lifespan of nearly 80 years or more have to be paid for over two decades after superannuation.

●       Moreover, in the event of the death of the pensioner, their spouses are entitled for a portion of the pension under the OPS. This led to a massive pension burden on the Union and State governments.