Old Pension Scheme (OPS) in India was abolished as a part of pension reforms by Union Government. Repealed from 1 January 2004, it had a defined-benefit (DB) pension of half the Last Pay Drawn (LPD) at the time of retirement along with components like Dearness Allowances (DA) etc. OPS was an unfunded pension scheme financed on a pay-as-you-go (PAYG) basis in which current revenues of the government funded the pension benefit for its retired employees. Old Pension Scheme was replaced by a restructured defined-contribution (DC) pension scheme called the National Pension System.
The Union Government's pension liabilities in Budget Estimate 2022–2023 on account of Old Pension Scheme for existing retirees was ₹2.07 lakh crore. The cost of pension for all State Government's combined Budget Estimate 2022-2023 was ₹4,63,436.9 Crores.
History The practice of pension payment to retired employees is evident in Colonial India since 1881. OPS has its origins since British rule when the Royal Commission (Lee Commission) on civil establishments in 1924 recommended half the salary during active service to be given as pension after retirement for its recruits serving in India. Adoption of Government of India Act 1935 further strengthened the provisions of pension benefits to government employees in the pre-independence era.
Benefit An employee joining the central or state services prior to 1 January 2004 would receive pension payments as lifetime income security from the time of retirement (at age 58, in most cases) until death. This was an entitlement for government employees for their services rendered during the tenure which often lasted more than three decades. The amount received monthly as Superannuation Pension was derived from number of years served and 10-month average salary before the retirement. However, Gratuity and Provident Fund are received as lumpsum at the time of retirement.
Current Beneficiaries Soldiers employed in Indian Armed Forces continues to have OPS in the form of service pension after their retirement. MPs and MLAs have the lifetime benefit of Old Pension Scheme with continued monthly income with all other benefits, after serving one tenure of five years. High Court and Supreme Court judges are eligible for lifetime defined benefit pension under OPS.
Exception Existing faculties from of Indian Institutes of Technology (IITs), Indian Institutes of Management (IIMs), Indian Institute of Science (IISc), Central Universities, and dozens of other CEIs shifting from one such institution to another after January 2004 were allowed by the HRD Ministry to continue with OPS.
Following a supreme court order in 2023, Department of Pension and Pensioners’ Welfare (DPPW) allowed the employees who joined the Central government services as per posts advertised or notified before 22 December 2003 one-time option to choose OPS before 31 August 2023.
Defined Benefit Pension vs. Defined Contribution Pension Defined Benefit (DB) scheme like OPS is a type in which the beneficiary pension is based on a defined formula which may have a percentage of salary or a percentage of salary times the years of service or a flat rate per year of service as its parameters. The simple administration with provision for a secure income for pensioners is the advantage of this scheme while the employer, i.e., government in this case, bears the risk. Having a pure DB or PAYG system of pension costs heavily on the Government finances. The scheme is non-contributory, i.e. the workers do not contribute during their working lives.
Defined Contribution (DC) scheme like NPS is a type of in which the beneficiary makes contributions to a retirement fund during his service and the receivable pension is based on the balance in his pension fund at the time of his retirement. The fund balance is sum of individual contribution and the accrued yield earned on the investment of fund over a period of time. DC scheme provides more flexible and easy portable retirement benefits for the pensioner. In India's context, the extent of benefit at retirement relies upon the quantum of employee's along with the government's contribution and the returns thereon, while the investment risk is borne by the employees.
Since pension is both a reward for continuous service till the formal age of retirement as well as a form social security in old age, India favored a restructured pension ensuring a balance between retirement benefit of the government employees and the financial burden on the economy by moving from DB scheme to DC scheme.
Pay-As-You-Go (PAYG) Under a PAYG scheme, current generation of workers contributes by paying taxes for the pensions of retired workers belonging to previous generation. This can be seen as direct transfer of resources from younger generation to older generation. It can have positive impact on poverty through income transfer to poorer workers. PAYG works well in the booming economy where active contributors outnumber the current pensioners. When the population of retirees is far less than population of productive young workers (low old age dependency ratio), the scheme yields high benefits with low contributions. Life expectancy in India has increased drastically over the decades. High old age dependency ratio and increasing number of unemployed youth could make this kind of unfunded schemes highly unviable.
Pension Reforms
A Policy Research Report by World Bank in 1994 titled "Averting the Old Age Crisis" gave rise to the worldwide discussion on pension sector reforms. A High Level Expert Group on Pension was constituted on 25 June 2001 by the Ministry of Personnel, Public Grievances and Pensions which found that the implementation of the Fifth Central Pay Commission's recommendations resulted in "quantum jump" of government expenditure on pensions. It recommended setting up new pension scheme with contributions from both employees and the government to a pension fund under an independent Development and Regulatory Authority. The report submitted by the group to government noted in its foreword: "The logic of the welfare state had prompted most of the developed countries to introduce increasingly liberal post-retirement benefits to their citizens. However, demographic changes in these highly industrialised and post-industrialised societies have made such pension commitments unsustainable in the long run. Pension reform has, therefore, now become a major public policy issue in most developed countries."
Reserve Bank of India (RBI) decided in its Eleventh Conference of State Finance Secretaries (2003) to constitute a group for studying "the pension liabilities of the State Governments" and to come up with suitable recommendations. The Economic Survey 2004-05 pointed out that "Unfunded pensions have become a major fiscal drag worldwide. The pressure of pensions on Central and State finances is becoming increasingly burdensome."
Congress-led United Progressive Alliance (UPA) government Pension Fund Regulatory and Development Authority (PFRDA) Bill 2005 in the Parliament to replace an Ordinance introduced in late 2004 by the earlier BJP-led National Democratic Alliance (NDA) government.
Arguments in favor of Pension Reforms
Financial Unsustainability A major portion of outgo in government revenue is paid as pension benefits to its retired employees and hence considered as economic liability with potential to adversely impact the "fiscal soundness of the Government entities."
The Union budget of India for the year 2001-02 acknowledged that the pension liability for the government has "reached unsustainable proportions".
States' ability to meet the growing pension liabilities is directly proportional to revenue increment and decreased revenue expenditure. Huge pension costs over long time raises concerns on fiscal sustainability of the economy and given the magnitude of the problem, structural alteration in the existing pension scheme would therefore appear to be necessary.
Need for Wider Coverage The Economic Survey 2004-05 highlighted pension reforms in the chapter on Public Finance. About 89% of working population were out of any kind of post-retirement pension benefit. India need a universal pension plan for its entire population, especially the elderly which is estimated to reach 31.5 crores (315 million) by 2050.
Arguments against Pension Reforms
Deferred Wage The Supreme Court of India in one of its judgement noted that pension for a retiree "is neither a bounty nor a matter of grace depending upon the sweet will of the employer." It did not consider the pension as an ex gratia payment, but a payment to employees for their past services rendered. The court held that it is a social welfare measure, aimed at rendering socioeconomic justice "to those who in the heyday of their life ceaselessly toiled for the employer on an assurance that in their old age they would not be left in the lurch."
Pay Differential in Public and Private Sector After the economic liberalization of 1991, the pay in Private sector was gradually seen as better than that in Public sector. Various studies reveal mixed evidence of one being better than other. Job security with assured pension provisions post-retirement can be an incentive to acquire and retain the talented workers. However, it is also a fact that the work efficiency of most government employees with long service is always under question.
Financial Burden on the Economy
The ever increasing year-on-year budgetary allocation for pension expenditure can be attributed to a number of factors which include expansion in the number of Government employees; extension of pension benefits to those employed in various non-Government offices like Grant-in-Aid Institutions and Local Bodies; impact of various pay revisions; introduction of wage indexation, and significant improvement in life expectancy which results in prolonged payment of pension to retirees.
State Government
The cost of pension payments of the State Governments to its retired employees in 1979-80 was Rs. 268 crore. Pension expenditure of States in 1980–81 as a proportion of total revenue receipts (which includes grants & other receivables from centre) was 2.1 per cent. It almost doubled in a decade from 5.4 per cent in 1990–91 to more than 10 per cent in 2000–01. In the 1990s, State Governments expense towards pension was rising at a CAGR of 27% per annum. From 7,813 crore in 1995–96, in 2001-02 the pension expenditure of States reached Rs. 28,197 crore. The ratio of pension payments to States' own revenue receipts (which excludes receivables from centre and other monetary assistance due to federal structure) increased to a greater extent from 3.4 per cent in 1980–81 to 17.2 per cent by 2001–02. The growth of total revenue receipts of the States in two decades during the period 1980-2002 was 14.3 per cent. It was much lower than the 23.6 per cent growth in pension payments.
Combined expenditure for all states put together jumped by 125 times to Rs 386,001 crore in 2020-21 from Rs 3,131 crore in 1990–91.
RBI in its 2003 study found that the committed expenditure of few States on salary, pension and interest payable for borrowed money together has already exceeded their total revenue receipts. It also mentioned the "stray instances" of the existence of excessive count of retirees availing pension probably due to absence of periodic and strict verification of the records of all the State Government pensioners.
State governments spend huge amount of money in Pensions for its employees as compared to developmental expenditure like Health, Housing, Social Welfare for general public etc.