New Pension Scheme

Future security of workers dependent on speculation by insurance companies

Government employees all over the country are up in arms against the New Pension Scheme, also known as the National Pension System (NPS), which has been made mandatory for all government employees (except employees of the Armed Forces) who joined service after January 1, 2004. Thousands of government employees organized under the banner of National Movement for Old Pension Scheme (NMOPS), held a protest demonstration at Parliament on September 30, 2019, to oppose the NPS and demand restoration of the old pension scheme. All the Central Trade Unions as well as the organisations of University teachers, government school teachers, bank, insurance, telecom services, etc. are resolutely opposing the new pension scheme.

To appreciate the opposition of the workers to the new pension scheme, we can compare the old and new schemes and see why workers feel their future security threatened by the new pension scheme.

The old pension scheme

Government employees appointed prior to 2004 receive their post retirement benefits through the Old Pension Scheme, which is categorized as a ‘defined benefit type’. ‘Defined benefit’ means that the post-retirement income is defined on the basis of the last salary received by the employee.

The government pays the equivalent of 50% of the last salary drawn to employees after retiring, and to their dependent family members in case of death. It also pays Dearness Allowance based on All India Price Index for Consumers as well as a fixed medical allowance. After the age of 80 the employee gets an additional pension of 20% of the basic pension.

In the old system, the entire pension amount was borne by the government.

The new pension scheme

The new National Pension Scheme (NPS), applicable for all employees employed on or after January 1, 2004, makes the post-retirement income of the employee totally dependent on returns for investments made in the share market.

The National Pension System works on ‘defined contribution’ basis. ‘Defined contribution’ means that the employee contributes a defined portion of his income, which is then invested in the share market. The investment may be in some combination of Equities, Corporate Bonds and Government Securities. The returns from the investment will constitute the employee’s post retirement income. The government has assigned specific pension fund managers for the task of managing the investors’ money.

NPS works on a two tier system, Tier-I and II. Contribution to Tier-I is mandatory for all Government employees joining service on or after January1, 2004 (except the armed forces), whereas Tier-II is optional.

In Tier-I, a Government employee has to make a contribution of 10% of his basic pay plus DA, which will be deducted from his salary every month. The Government will make an equal matching contribution.

Tier-I contributions (and the investment returns) will be kept in a limited partially withdrawable Pension Tier-I Account. Tier 1 has a fixed lock-in period. Initially it had been announced that subscribers can only withdraw the accumulated wealth after they retire, i.e., are 60 years old. However, in the 2017 Union Budget, it has been announced that an employee may withdraw 25% of his contribution to the NPS prematurely, in case of emergencies. This amendment applies starting with the assessment year 2018-19.

Tier-II is a voluntary account, in which the employee can deposit any desired amount. An employee can withdraw any amount from the Tier-II account at any time. The government does not contribute anything in the Tier II account. Tier II account can be opened only when you have an active Tier I account. The contribution of the employee to NPS is eligible for deduction for income tax benefits.

Death-cum-Retirement Gratuity is paid to Central Government employees under New Pension System (NPS) under the same terms and conditions as it is paid under the old pension scheme.

Unlike the old pension scheme, the NPS does not guarantee any fixed returns as it is linked to returns on investments in the share market.

A Government employee can exit at or after the age of 60 years from the Tier-I of the Scheme. At the time of retirement, the employee can withdraw only 60% of the total amount, which is taxable. It is mandatory to invest the remaining 40% to buy a lifelong annuity scheme through an insurance company registered under the IRDA (Insurance Regulatory and Development Authority). If the employee leaves the scheme or retires before attaining the age of 60, 80% of the pension wealth has to be invested in the annuity scheme.

The NPS was notified by the government on December 22, 2003, effective from January 1, 2004. Many state governments have adopted the NPS, on different dates after January 1, 2004. It was subsequently extended to all citizens of India with effect from 1 May 2009, including self-employed workers and workers in the unorganized sector, on a voluntary basis. However, there will be no contribution from the Government for non-government employees.

The government and its spokespersons have justified the annulment of the old pension scheme and the implementation of the new pension scheme (NPS) by the argument that the old pension scheme was becoming a “rising financial burden” for the government, which would “not be sustainable in the long run”.

Instead of providing its retired employees a defined, fixed, guaranteed social security, the government is forcing them to invest their life’s savings in the share market for speculation by the finance companies to make profits. The post-retirement income will depend on the investment returns.

Widespread opposition to the NPS

Government employees are vehemently opposed to the NPS. They are demanding restoration of fixed pension based on last income.

Under the old pension scheme, employees did not need to contribute anything. Under the NPS they have to fund a part of their pension corpus by their own contribution.

After they retire and 60% of the corpus is paid out to them, the remaining 40% has to be compulsorily invested in equity linked funds.  Retired employees are in constant anxiety of losing their money in the equity market. (See Box: Workers will face greater insecurity after retirement with the NPS).

Universal pension guaranteed by the state is a just demand

Pension is a form of social security for a worker after he has retired from work at a certain age. It is therefore considered to be universal, adequate to ensure a dignified existence to the worker when he is no longer able to work and continuously upgraded for rising cost of living. It is an essential duty and responsibility of a modern state to provide pension and social security to its retired citizens.

Large sections of the working people in our country, who are not employed by the central or state governments, are not eligible to any pension or social security after retirement. The government claims that through the NPS it is aiming to create a “society in which everyone receives pension”, as even unorganized workers can be part of the NPS. This is fraudulent propaganda meant to fool the workers. The private employers do not have to contribute anything to the workers pension fund. The government will contribute nothing to it either. It will be contributed for entirely from the worker’s salary and will be mandatorily invested in the share market, to ensure profits for the financial speculators.

The trade union movement of our country is fighting for a universal minimum pension of Rs. 10,000 per month, along with a national minimum wage of Rs. 21,000 per month.

On the one hand, the government has no hesitation in handing out lakhs of crores of rupees of the people’s money to the biggest monopoly capitalist houses to enhance their profits. It is ready to write off lakhs of crores of rupees looted by the big corporate houses in the form of “bad loans”. It is quick to provide tax concessions, the most recent one worth Rs. 1.45 lakh crore, to the biggest corporate houses. On the other hand, the government has declared that providing a guaranteed pension to its employees after retirement is a “financial burden” that it cannot bear. Through the New Pension System, it is refusing to guarantee a fixed income for workers after they retire, while forcing workers to invest their life’s savings in the share market, to enhance the profits of the capitalist speculators and insurance companies.

Workers, through their labour, contribute to society during the years they work. It is the duty of society to ensure that they are taken care of in their old age, or when they suffer injuries and are unable to work any longer. The demand for universal pension for all retired workers is a just demand of the working class. The state has to ensure that a portion of the surplus value extracted from the workers by the capitalists is taken back and put into a pension fund for workers. This must be in addition to the contribution of workers from their salaries. For workers who do not have fixed employers, like construction workers, the state must take up the responsibility of building a pension fund for their life after retirement. On no account must the pension funds of workers be invested in speculative activities.

Workers will face greater insecurity after retirement with the NPS

Tapan Sen, General Secretary, Centre of Indian Trade Unions (CITU), clearly explains: “The minimum pension amount under the old scheme is Rs 9,000 which has been calculated keeping in mind entry-level minimum wages. Real pension amounts are much higher as nobody retires on entry-level wages. In the new scheme, even those who have worked for a decade are getting as little as Rs 1,000-2,000. This is a disastrous policy.” He points out that through this scheme, people’s money is being used by the government to enhance the profits of the speculators in the share market, at the cost of the government employees.

The government and its spokespersons are promoting the illusion that just like a standard Systematic Investment Plan, long-term capital gains under NPS would be better than before. However, the agitating employees have shown through substantial arguments, that for those retiring after 10-12 years under NPS, the accumulated wealth is too less to provide substantial amount as pensions.

For example, a former employee of the Haryana Electricity Board explains: “The total accumulated money in my NPS account on retirement was Rs 3.25 lakhs even when I got 13% interest rate on it. After 60% of it was paid to me on retirement,

I am receiving less than Rs 700 every month as pension through the annuity scheme”. He was made permanent in November 2006 and retired in 2013. NPS was enforced in Haryana from 2006. He says his colleagues who were recruited not long before him are receiving over Rs 15,000 as pension under the old scheme.


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