Convergence of India’s Pension System
India's pension system has converged in the last two decades, from a traditional, defined benefit structure to a more sustainable and inclusive model known as the National Pension System (NPS).
The defined benefit pension system
Historically, India's pension system was based on a defined benefit pension model, where retirees received a fixed percentage of their last drawn salary as their monthly pension. After their death, the spouse was entitled portion of the original pension. This pension was provided by the government, and only covers employees of the central and state governments, and a few public sector undertakings.
However, this older pension system faced several challenges. Demographic shifts, such as an aging
of population and increasing life expectancy, posed fiscal burdens on the government, leading to concerns about its long-term viability.
Project OASIS (Old Age Social and Income Security)
Recognising the need for reform, the Ministry of Social Justice and Empowerment set up the Committee for Old Age Social and Income Security in 1998 which was known as the Project OASIS Expert Committee.
The Committee was asked to take into consideration the concerns regarding the large expenditure on retired government employees not being sustainable for long, and the existing systems for private, informal and unorganised sectors not being adequate.
Steps to Open an NPS Account
- The objective of this Report was to recommend a pension system which is can be also used by individuals and, which can enable them to attain old age security at the price of modest contribution rates through their working career. It is simple and convenient to use and has the capability for converting modest contributions into reasonably large and comfortable sums in an almost risk-free manner for old age security.
The Committee, under the chairmanship of Dr. S. A. Dave, played a pivotal role in laying the groundwork for the pension reform in India. It conducted thorough research and analysis, assessing the challenges of the old pension system and proposing comprehensive reforms to address them. Published in 2000, the committee’s report advocated for the establishment of a contributory pension scheme, emphasizing the principles of sustainability, efficiency, and equity. Their work provided the impetus for the eventual transition in the country’s pension architecture.
Transition to the National Pension System
Thus, India embarked on a journey to modernize its pension framework, culminating in the introduction of the New Pension Scheme (today’s National Pension System) in 2004. The NPS represented a paradigm shift towards a defined contribution model, where both – the government employers and employees – contribute to individual retirement accounts, which are then invested in a diversified portfolio managed by pension fund management companies.
More importantly, NPS took under its purview the self employed and those employed in the private sector also; with the implementation of NPS-All Citizens in 2009 and NPS-Corporate in 2011, respectively.
A variant of the scheme for those in the informal sector was introduced in 2010 in the form of NPS-Lite. This was eventually discontinued when the newer Atal Pension Yojana (APY) was implemented in 2015.
Evolving and reforming
India’s pension system is still evolving, taking into consideration the concerns of a wide range of voices. Recent developments like – subscribers getting the option of selecting up to three Pension Fund Managers. (PFMs) for their NPS investments; or the implementation of the Systematic Lumpsum Withdrawal (SLW) allowing subscribers an additional way of accessing the final corpus – have only made the system more flexible.
Conclusion
India's transition from the older pension system to the National Pension System represents a significant milestone in its journey towards financial security and social welfare. By embracing a defined contribution model, NPS not only addresses the shortcomings of the erstwhile system but also fosters a culture of individual responsibility and empowerment in retirement planning.
For any NPS-related query, please write to nps[at]sbipensionfunds[dot]com