Dynamics of Pension Schemes in India
Sweety Kumari
ICFAI Law School, ICFAI University, Dehradun
This Article is written by Sweety Kumari, a Fifth-year law student of ICFAI Law School, ICFAI University, Dehradun
INTRODUCTION
The word Pension is derived from the Latin term pension which means payment. Pension is a systematic framework in which a fund is made in which a fixed amount is paid periodically while the pensioner is working for a long time. After he retires from work, periodic payments are paid from this fund to support him.[1].
HISTORY OF PENSIONS
It is wondered that pension is a new concept but this notion is incorrect. This system traces it back to ancient civilizations like the Roman civilizations.
Roman Empire: In the Ancient Roman Empire, there was a system to grant pensions to the military servicemen for their service in the army as soldiers The soldiers of the middle and late Roman Republic were granted pensions as they were not as wealthy as their predecessors (the early roman soldiers) to hold surplus land to continue their livelihood after their service. After the Second Punic War which was fought in 201 BC, the soldiers of General Publius Cornelius Scipio Africanus who had served in Spain and Africa were provided with land as retirement.
Medieval Europe: During this time, guilds and monasteries had a system of pensions for their elderly retired employees.
The Pension scheme in India was first introduced by the Britishers after the Revolt of 1857. The objective of the Britishers behind this introduction of this plan was to ensure that the local rulers supported the British rule and did not take part in any rebellious act against them. This pension scheme was for the then Kings only and not for the general public.
In India, in 1871, the Britishers framed the first law on pensions- the Indian Pensions Act 1871. This act contained provisions it for the grant of pensions to military personnel, civil servants, and judicial officers. This act was the first formal enactment for the grant of pensions in India.[2]. With the development of industrialization and the demand for social security, this scheme has become a new normal. Presently, pension plans have been introduced in the public sector as well and they largely have been supplanted by defined contribution plans in the private sector.
CATEGORIZATION OF PENSION PLANS
PENSION FUNDS
The government body that regulates pensions in India and supervises them is the Pension Fund Regulatory and Development Authority (PFRDA). Six companies have been authorized to operate as fund managers by the PFRDA. This also regulates the National Pension System.
DEFERRED ANNUITY
This pension plan is for long-term savings. In another type of pension plan in which a payout is immediately made, in deferred annuity payment future payout is made. The annuity’s value can also be increased by adding funds to the account. Also, a lump sum amount can be withdrawn from the account as and when required.
IMMEDIATE ANNUITY
As the name suggests, in this pension plan after a lump sum amount is deposited, the pension starts. So, the pension immediately starts after the deposit of the amount.
ANNUITY CERTAIN
In this type of plan, a guaranteed payment is paid to the annuitant and after his death to his beneficiaries. The amount is paid for a specific period. Thus, a guaranteed income is paid whether to the annuitant or after his death to his beneficiaries.
LIFE ANNUITY
This scheme offers to pay an amount to the annuitant for life after their retirement.
PENSION PLANS WITH AND WITHOUT COVER
Pension plans with cover are those pension plans in which along with retirement income death benefits are also covered. If the pensioner dies when the term period is still subsisting, then after his death his beneficiaries will receive death benefits.
Pension plans without cover are those pension plans that do not include death benefits and only provide retirement income.
NEW PENSION SCHEME
New Pension Scheme was introduced in the year 2004 by the Government of Atal Bihari Vajpayee. This scheme acted as a reform in the pension schemes. It is sponsored by the Central Government. Before NPS there was an Old Pension Scheme (OPS) for Government employees who had joined the service before January 1, 2004. This plan inculcates the habit of saving for the future (retirement). NPS is a contribution-based pension system. The contribution made in the scheme and the performance of the chosen funds are the factors that determine the return on investment.[3]. The most beneficial part of this scheme is that the contributions here are eligible for tax deductions under Section 80C of the Income Tax Act, 1961[4].
INTRODUCTION OF THE NEW UNIFIED PENSION SCHEME (UPS)
The Central Government recently announced a shift in the approach of pensions to the elderly by introducing the Unified Pension Scheme. The new scheme will be implemented from 1st April 2025 in which around 23 lakh employees are anticipating getting the benefit. In addition to these 23 lakhs, those employees will also get the benefit of this scheme who are already beneficiaries under the New Pension Scheme will opt for this new scheme.
FEATURES OF UPS
1. Under this scheme, after a minimum service of 25 years, government employees will be entitled to half of their average basic pay over the last 12 months of their service before retirement. This pay will be in the form of a monthly pension and this will be for life.
2. This scheme provides support to the dependents of the pensioner in case of his/her death. Family pension will then be equivalent to 60% of the employee’s pension.
3. There is a provision of a minimum pension of Rs 10,000/- for those employees who have worked for a minimum of 10 years.
4. This scheme also considers the inflation in the country. The pension amount will be increased by the consumer price trends for industrial workers akin to the dearness relief offered to serving government employees.
5. Also, at the time of retirement along with the gratuity amount a lumpsum superannuation amount is assured. This amount will be 1/10th of the monthly emoluments of an employee as of the date of superannuation for every six months of service.
DIFFERENCE BETWEEN OPS, NPS, AND UPS
The Old Pension scheme used the exchequer fund to fulfill the liabilities. In this scheme, pension includes 50% of the last drawn salary with dearness allowance (DA), an assured family pension of 60% of the last drawn pension, and a minimum pension of 9000rs plus DA.
The difference between OPS, NPS, and UPS is that OPD is a defined benefit scheme. In this, no contribution is made on behalf of the employee. Pension includes 50% of the last drawn salary along with DA. In this scheme, the risk is low. The beneficiaries of the scheme were those government employees who had joined the service before 1st January 2004.
NPS, on the other hand, is a defined contribution scheme. Contribution to the pension fund is made on the part of both the employer and the employee (the beneficiary). Pension depends on the accumulated amount and the annuity plan that is chosen. This scheme is for employees of both the government and the private sector. Risk herein is moderate to high as the amount depends on the market factors too.
UPS is a mixture of both the OPS and NPS. In this scheme, a minimum guaranteed pension of Rs 10,000 per month is available for employees with at least 10 years of service. Contribution is made from both the employers i.e. the government and the employee. The employee will have to contribute 10% of their salary and the employer will contribute 18.5% of the employee’s salary which will be subject to revision from time to time. And this scheme for now is introduced for only government employees.
CONCLUSION
Pension acts as a tool of social security. Post-retirement the employee has some security to live their livelihood and it makes them somewhere financially independent too. They become capable of living a dignified life post-retirement too. We have seen that pensions have a long history whether in India or the world. There are different types of pension plans with different characteristics. The Government has recently announced the UPS which will be applicable from 2025. It is hoped that UPS solves the problem that arose In NPS where employees who had fewer years of service were given lower pension benefits. There are speculations about the new UPS also like that of commutation options, and additional funding to curb government expenditures. It will take a matter of time to know whether this scheme is beneficial or not.
References
[1] Team Acko, ‘What Is Pension? - Types of Plans, Eligibility & Tax Implications’ (2024) Acko
https://www.acko.com/life-insurance/what-is-pension/ accessed on 10th September 2024
[2]‘ Pension Sector in India – Issues and Way Forward’ (2022) IAS EXPRESS https://www.iasexpress.net/article-pension-sector- in-india-issues-and-way-forward/ accessed on 10th September 2024
[3]‘National Pension System’ (2018) India.Gov.in https://www.india.gov.in/spotlight/national-pension-system-retirement-plan-all accessed on 18th September 2024
[4] ‘History Of Pension Schemes In India’ INSURANCEDEKHO
accessed 11th September 2024