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Beyond OPS Vs NPS, the question of India’s broken pension system

GS Paper 2

Syllabus: Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes


Source: IE

 Direction: The article discusses that India needs a newly reformed pension system, instead an NPS vs OPS debate.

 Context: Instead of discussing the issue of the old pension scheme (OPS) versus the new pension scheme (NPS), there is a need to revisit the idea of reforming the pension system in the country.

Need to reform the pension system:

  • According to the World Economic Forum, people aged 65 and above outnumber children aged five or younger. Though India is at a low risk now, the country may face a longevity risk.
  • Longevity risk points to a scenario where rising life expectancy could result in pension and insurance companies needing more cash.

India’s pension system standing in the global context:

  • According to the Mercer CFA Institute Global Pension Index 2022, which tracks –
    • Adequacy: What benefits are future retirees likely to receive?
    • Sustainability: Can the existing systems continue to deliver, notwithstanding the demographic and financial challenges?
    • Integrity: Are the private pension plans regulated in a manner that encourages long-term community confidence?
  • India’s pension system is ranked 41 out of 44 countries.

Gross inadequacy of India’s pension architecture:

  • At least 85% of current workers are not members of any pension scheme and are likely to remain uncovered or draw only social pension in their old age.
  • Of all elderly, 57% receive no income support from public expenditure and 26% collect a social pension as part of poverty alleviation.
  • The system for old age income support entailed 5% of public expenditure and state governments bear more than 60%.
  • Contributory program funds invested in government securities corner 40% of all interest payments of state governments.

Comparing the Indian scenario with the WB pension framework:

  • In 1994, the World Bank provided a 5-pillar (0, 1, 2,3, 4) framework:


  • This framework is modified by the National Institute of Public Finance and Policy (NIPFP) – an autonomous research institute under the Ministry of Finance, to suit Indian circumstances.


    • It is noteworthy that the OPS falls under Pillar 1 and the NPS falls under Pillar 2.
    • Pillar 1, where the government-funded pension schemes to a small percentage of the elderly accounts for almost 62% of all public expenditure.
    • Pillar 0, possibly the most essential one, gets just 4% of the total outgo.


What can be concluded from above?

  • India’s pensions system is in a dire need of reform and doing so will be both good politics and good economics.
  • Merely fluctuating between OPS and NPS is not a reform.


Conclusion: It is time for India to relook at its pension system and for the current debate to be broadened to look at pension requirements for the whole set of elderly.


National Pension Scheme (NPS):
  • The NPS is a voluntary and long-term retirement investment plan administered by the Pension Fund Regulatory and Development Authority (PFRDA), Ministry of Finance, Government of India.
  • It was launched in January 2004 for government employees and it was decided to discontinue defined benefit pensions/OPS for all employees who joined after April 1, 2004.


The Old Pension Scheme:

  • It was discontinued in 2004, however, it guaranteed life-long income after retirement.
  • Typically, the insured amount is equal to 50% of the most recently drawn salary.
  • The expenditure incurred on the pension is borne by the government.

Criticism of the OPS: It is fiscally unsustainable – governments in India do not have the money to fund it.

Criticism of the NPS: It is politically unsustainable – it fails to address the felt needs of the people. For example, NPS does not offer assured returns.

Insta Links:

National Pension Scheme


Prelims Links: (UPSC 2021)

Who among the following can join the National Pension System (NPS)?

(a) Resident Indian citizens only

(b) Persons of age from 21 to 55 only

(c) All State Government employees joining the services after the date of notification by the respective State Governments

(d) All Central Government employees including those of Armed Forces joining the services on or after 1st April 2004


Answer: c