OPS vs NPS: Why Are Government Employees Demanding Old Pension Scheme?

Explainer Government

Calling for the reinstatement of the Old Pension Scheme (OPS), lakhs of employees of the Maharashtra government went on indefinite strike from 14 March. Employees including government hospitals, schools, colleges, municipalities, Zilla Parishad, MHADA, and Tehsildar offices in all 36 districts have participated in this strike. 

Nearly 35 unions representing state government employees decided to go ahead on strike even after Chief Minister Eknath Shinde announced to set up a committee to look into the demand.

The National Pension Scheme (NPS), which was implemented in place of the Old Pension Scheme, has been the subject of much controversy since its inception. Dissatisfied with the new scheme’s terms, government employees across the country have launched a strike, seeking the restoration of their previous pension plan.

Last year, united employees of different government departments had gone on a two-day strike. While Haryana state government employees protested last month, state employees in Madhya Pradesh have announced a demonstration on 14 April. 

Let’s understand the issues surrounding the new and old pension schemes and the demands of the striking government employees.

What is Old Pension Scheme?

Under the Old Pension Scheme (OPS), the state and central government employees are given a monthly pension, as lifetime income security from the time of retirement until death. After the death of the retired employees, their dependent family members are also entitled to receive some portion of their pension. 

The OPS permits retired government employees to receive 50% of their last drawn salary as a pension. They are also given additional benefits of dearness allowance (DA) twice a year and the provision of the general provident fund (GPF).

The pension amount is predetermined and employees do not have to contribute to their pension plans. In simple terms, no salary deduction during the period of employment. It is fully funded by the government with zero contribution by the beneficiaries.

The OPS was repealed on 1 January 2004 as a part of pension reforms by the government of India.

What is National Pension Scheme?

BJP-led NDA government implemented National Pension Scheme (NPS) in 2003 to replace the OPS. It was mandatory for all new recruits to the Central government, with a few exceptions, to join on or after 1 January 2004. Army, Navy, and Air Force were excluded from the new pension scheme.

The NPS is a contributory pension scheme in which employees are required to contribute 10% of their salary while the government contributes 14% towards the employees’ NPS accounts.

Following retirement, employees under NPS may withdraw a portion of their pension amount (60%) as a lump sum and utilize the remainder to purchase an annuity, resulting in a regular income stream. 

The scheme was launched to cut the rising fiscal burden as a way for the government to divest itself of pension liabilities.

What is the difference between OPS and NPS?

The NPS is designed to be financially sustainable, while the OPS has become unsustainable due to rising life expectancy and the government’s pension liabilities. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

The OPS guarantees a fixed pension amount upon retirement, while the NPS is a market-linked savings product where the pension amount is determined by the collective contributions and market performance.

Under the OPS, employees are not required to contribute to their pensions, while under the NPS, employees must contribute 10% of their salary.

The NPS is portable, which means that employees can continue their pension account even if they switch employers, while the OPS is tied to the government job.

Why do government employees want to get rid of NPS?

A federation of Union government employees’ unions had written to the cabinet secretary requesting that the OPS be reinstated because NPS is a “disaster for retired employees.”

“The NPS employees despite their contribution of 10% of their salary every month for their entire service are getting only a very meager pension. The pension under NPS remains static and there is no dearness relief to compensate the price rise /inflation as available in the OPS,” the letter said.

Under the NPS, the pension amount is dependent on the contributions and market performance, which means that the final pension amount is uncertain and may be lower than expected.

Some employees may not be aware of the benefits of the NPS or how it works, leading to confusion and opposition. According to the Wire, the employees say they initially had little understanding of the scheme as there were no active efforts to educate them or raise awareness about it. Some argue that for those retiring after 10-12 years under NPS, the accumulated wealth is too less to provide a substantial amount as pensions.

The NPS does not offer a family pension, which provides financial support to the employee’s family after their death, unlike the Old Pension Scheme (OPS).

Which states have restored the OPS?

Rajasthan, Chattisgarh, Punjab, Himachal Pradesh and Jharkhand state governments have restarted the OPS for their employees. 

Assam, Kerala, and Andhra Pradesh have appointed committees to investigate OPS, and numerous states have started a campaign for the reinstatement of the pension scheme. 

Earlier this month, the Central government issued an order allowing certain employees to opt for the Old Pension Scheme (OPS). The Ministry of Personnel stated that employees who were recruited in the posts advertised or notified prior to 22 December 2003 are eligible to enroll in the OPS under the Central Civil Services (Pension) Rules, 1972 (now 2021). The select group of government servants can opt for this option by 31 August 2023, reports Mint.

This month, government employees in Karnataka withdrew their indefinite strike after the state government announced a 17% hike in basic salary.

Why did RBI warn against OPS?

Reserve Bank of India (RBI) cautioned against the restoration of OPS as several states opted out for the old scheme. 

In a report called ‘State Finances: A Study of Budgets of 2022-23’, the central bank observed that reversion to the old pension scheme by some States is a “major risk looming large on the subnational fiscal horizon.”

That the OPS increased the government’s liability by putting the burden of employees’ pensions on the states, risking their financial security.

Former RBI governor D Subbarao criticized the states that restarted Old Pension Scheme. Calling it a decidedly a regressive move, he said OPS would provide more privilege to government servants at the cost of the larger public.

According to the Indian Express, states are expected to incur a 16% rise in pension expenditure at Rs 4.6 lakh crore in 2022-23 as against Rs 3.9 lakh crore in the previous year as per the Budget estimates for 2022-23.


Title:OPS vs NPS: Why Are Government Employees Demanding Old Pension Scheme?

By: Mayur Deokar