Guaranteed Pension Scheme, Old Pension Scheme, and New Pension Scheme

The Union Finance Ministry has expressed interest in a new model put forth by the government of Andhra Pradesh at a time when the nation is discussing the merits of the Old Pension System (OPS) vs the New Pension Scheme (NPS). This topic assumes relevance for the Indian economy section of the UPSC syllabus.

Guaranteed Pension Scheme (GPS)

The Chief Minister of Andhra Pradesh has proposed a new pension plan on which the Union Government will debate.

  • The Old Pension System (defined benefit) and the New Pension Scheme are both features of the Andhra Pradesh Pension Plan, a unique pension concept (defined contribution).
  • The program is also referred to as the “Guaranteed Pension Scheme” (GPS).
  • The idea “is attractive,” according to Union Finance Ministry officials, but it needs to be thoroughly explored.

Guaranteed Pension Scheme Features

  • Employees who pay a monthly contribution of 10% of their basic income and the state government’s matching 10% can receive a guaranteed pension under GPS equal to 33% of their last received wage.
  • And if they are willing to contribute a greater 14% of their monthly wage, which will be matched by a 14% government contribution, they can receive a guaranteed pension of 40% of their last drawn salary.
  • It includes aspects of both the New Pension Scheme and the Old Pension System (defined benefit) (defined contribution). In doing so, it provides two alternatives for “defined benefit” and requests a monthly “defined contribution” from the employees.

Old Pension Scheme:

  • The scheme guarantees a post-retirement income for life.
  • Typically, the promised sum is equal to 50% of the last wage received.
  • The cost of the pension is covered by the government. The program was abandoned in 2004.

New Pension Scheme:

  • The government adopted NPS for use among its employees after it was initially created for workers in the unorganized sector.
  • On December 22, 2003, NPS for Central Government employees was made known, and it became a requirement for all new government hires beginning on January 1, 2004.
  • A matching contribution from the government and 10% of the employee’s base salary and dearness allowance made up the defined contribution. The government’s share of the basic pay and dearness allowance increased to 14% in January 2019.

Guaranteed Pension Scheme Vs Old Pension Scheme Vs New Pension Scheme

Guaranteed Pension Scheme: Old Pension Scheme: New Pension Scheme:
  • It is a Defined Benefit Plan where the employer guarantees a fixed retirement benefit to an employee based on a pre-determined formula that takes into account the employee’s salary and years of service.
  • The employer bears the investment risk and is responsible for ensuring that there are sufficient funds to pay the pension benefit.
  • It is typically offered to government employees and some private companies in India.
  • It is a Defined Benefit Plan offered to government employees who joined service before January 1, 2004.
  • Under this scheme, the employee is entitled to a fixed pension, which is calculated based on their length of service and the average of their last 10 months’ salary before retirement.
  • The government is responsible for funding the pension and is required to contribute a certain percentage of the employee’s salary towards the pension fund.
  • It is a Defined Contribution Plan offered to government and private sector employees.
  • Under this scheme, the employee contributes a certain percentage of their salary towards the pension fund, and the employer also makes a matching contribution.
  • The funds are then invested in various asset classes, such as equities, bonds, and government securities, based on the employee’s risk appetite.
  • At retirement, the employee can withdraw a portion of the corpus as a lump sum, and the rest is used to purchase an annuity that provides a regular income stream.

Conclusion:

  • The main differences between these schemes are in the way they are structured and managed. The Guaranteed Pension Scheme and the Old Pension Scheme are Defined Benefit Plans, where the benefit is fixed and guaranteed, and the employer is responsible for funding it. 
  • The New Pension Scheme is a Defined Contribution Plan, where the benefit depends on the contributions made by the employee and the investment returns earned on those contributions, and the employee bears the investment risk. 
  • Additionally, Guaranteed Pension Scheme and Old Pension Scheme are typically offered to government employees, while New Pension Scheme is offered to both government and private sector employees.

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