The Evolution of India's Pension System: A Comprehensive Review

India's retirement framework has transformed significantly over the past two decades. The National Pension System (NPS), initially called the New Pension Scheme, marked a major shift in India's approach to pension management. More recently, the Unified Pension Scheme (UPS) represents another important development.

- Dhaval Kansara Chief Manage Union Learning Academy Digital Transformation, Mumbai

Introduction

India's retirement framework has transformed significantly over the past two decades. The National Pension System (NPS), initially called the New Pension Scheme, marked a major shift in India's approach to pension management. More recently, the Unified Pension Scheme (UPS) represents another important development. This article examines these pension frameworks, their impact on India's economy, and retirement security architecture, with particular focus on the UPS.

Historical Context and Need for Reform

Before 2004, India had a defined benefit pension system for government employees that promised fixed retirement income regardless of contribution. This created an unsustainable fiscal burden, with pension payments consuming approximately 8-10% of India's GDP by the early 2000s.

• The Old Pension Scheme (OPS) faced several challenges:

• Growing fiscal pressure on government finances

• No formal pension structure for the private sector

• Increasing elderly population

• Rising life expectancy creating longer retirement periods

These factors led to the establishment of the Pension Fund Regulatory and Development Authority (PFRDA) and the launch of the National Pension System in January 2004.

Core Structure of the NPS

The NPS introduced a defined contribution model to replace the defined benefit structure. Under this system, contributions are fixed while benefits depend on investment returns, shifting investment risk from the government to individual subscribers.

Key Structural Elements

Two-Tier Account System:

Tier I: A non-withdrawable retirement account with tax benefits

Tier II: A voluntary savings account with withdrawal flexibility