Relevance : GS-2 : Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

Key Phrases: National Pension System, Defined Pension Benefit Scheme, Karmachari Samyukta Mahasangh, Pension Fund Limited, PFRDA, DoPT.

Why in News?

• Recently Rajasthan Chief Minister announced restoration of the old pension scheme for the government employees, who joined the service on or after January 1, 2004.
• The announcement meant that the National Pension System (NPS) would be discontinued in the State. Following this, another Congress-ruled State, Chhattisgarh announced restoration of the Defined Pension Benefit Scheme (DPBS/OPS).

Old pension scheme or the Defined Pension Benefit Schemes

• 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.

National Pension System (NPS)

• The Union government under Prime Minister Atal Bihari Vajpayee took a decision in 2003 to discontinue the old pension scheme and introduced the NPS.
• The scheme is applicable to all new recruits joining the Central Government service (except armed forces) from April 1, 2004.
• On introduction of NPS, the Central Civil Services (Pension) Rules, 1972 were amended.
• It is a participatory scheme, where employees contribute to their pension corpus from their salaries, with matching contribution from the government.
• The funds are then 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 greater flexibility in terms of withdrawal, and one can withdraw at any point of time, unlike Tier I account.
• Even private individuals can opt for the scheme.

Changes Introduced in 2019

• In 2019, the Finance Ministry said that Central government employees have the option of selecting the Pension Funds (PFs) and Investment Pattern in their Tier-I account.
• The default pension fund managers are the LIC Pension Fund Limited, SBI Pension Funds Pvt. Limited and UTI Retirement Solutions Limited in a predefined proportion.

Regulatory authority to manage the funds of government employees that are linked to the market

• The Pension Fund Regulatory and Development Authority (PFRDA) is the regulator for NPS.
• PFRDA was set up through the PFRDA Act in 2013 to promote old age income security by developing pension funds to protect the interest of subscribers to schemes of pension funds.
  Subscriber Base
• As on February 28, there were 22.74 lakh Central government employees and 55.44 lakh State government employees enrolled under the NPS.

What is the latest directive from the government on the pension system?

• The Department of Personnel and Training (DoPT) informed Parliament recently that there is no proposal to reintroduce the old pension scheme for Central government civil employees under consideration of the Government of India.
• The Government had maintained that restoration of the old system would cause an unnecessary financial burden on the government.
• The Finance Ministry had earlier ruled out proposals by a federation of Central and State governments employees saying that the “changes will be financially untenable.”
• Union Minister said that the returns being market-linked is a basic design feature of the NPS. However, pension being a long-term product also enables the investments to grow with decent returns, despite short term volatility.

Disadvantages or Cons of the NPS

1. Lesser Benefits (For the Government Employees) than the Earlier Pensions Schemes
   • The NPS scheme was created by the Government of India, in order to stop all the defined pension related benefits that it gave to its employees.
2. Withdrawal Limits
   • NPS restricts all kinds of withdrawals, before the subscriber reaches the age of 60 years.
   • The subscriber can make the first withdrawal from NPS, after 10 years of opening the account, and a total of 3 withdrawals, till he or she reaches the age of 60 years.
   • The withdrawal cannot be more than the total sum of all the contributions made by the subscriber.
3. Taxation at the Time of Withdrawal
   • The NPS corpus, which the subscriber can use for buying annuity or for drawing pensions, is taxable, when the schemes matures.
   • 60% of the investment in the NPS is taxed upon by the Government of India, while 40% escapes taxation.
4. Investment Restrictions
   • The subscriber cannot invest more than 50% of his or her total investment in the NPS account, towards the equities.
5. No Guaranteed Returns
   • While NPS is a government scheme, the corpus is created according to the returns, which are generated under the corporate bonds, government securities, and the equity. Hence, the market fluctuations can affect the returns/gains adversely.

Sources: The Hindu

Mains Questions:

Q. How will the National Pension Scheme benefit the employees? What are the changes introduced in the scheme?