Comparison of National Pension Scheme (NPS) and Old Pension Scheme (OPS)

Comparison of National Pension Scheme (NPS) and Old Pension Scheme (OPS)

Nov 18, 2024

Pension schemes play a vital role in securing financial stability after retirement. Both the National Pension Scheme (NPS) and the Old Pension Scheme (OPS) have been prominent retirement benefits in India, offering distinct features to employees. With changing economic conditions, it’s important for businesses to understand how these schemes impact long-term financial planning. 

Today, we will provide a comparative look at NPS and OPS, highlighting their key differences and what businesses should consider when deciding on these pension options for their employees.

What is National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-initiated pension system that aims to provide financial security during retirement. This is a contributory scheme, open to all Indian citizens. It encourages individuals to save for their future. Both employers and employees can contribute to the NPS, which invests funds in a mix of debt and equity to grow over time.

Some of the features of NPS include:

• Flexibility in Investment
• Tax Benefits
• Partial Withdrawal

NPS is considered a practical choice for businesses that want a defined contribution-based plan for their employees. It reduces the long-term liabilities associated with pension schemes.

Overview of the Old Pension Scheme (OPS)

The Old Pension Scheme (OPS) is a benefit system that was prevalent in India until it was replaced by NPS in 2004. OPS provides government employees a guaranteed monthly pension after retirement, calculated as 50% of the last drawn salary. Unlike NPS, OPS does not require employee contributions, as it was a fully employer-funded retirement plan.

Key highlights of OPS are:

• Defined Benefits: OPS ensures a fixed pension amount, which provides financial predictability for employees post-retirement. The fixed nature is a major attraction for employees seeking stability.
• Dearness Allowance (DA): OPS includes periodic Dearness Allowance adjustments, ensuring the pension value keeps up with inflation.
• No Employee Contribution: Since OPS requires no contribution from employees, it is perceived as a more straightforward benefit compared to the contribution-based NPS.

For businesses, OPS poses a greater financial burden since the entire responsibility lies on the employer. However, it creates a strong sense of loyalty among employees due to the promise of assured benefits.

Key Differences between NPS and OPS

• Scheme Type: NPS involves both employer and employee contributions. OPS depends solely on employer funding and guarantees fixed payouts.
• Pension Amount: NPS varies based on market performance, offering potential growth but less certainty. OPS guarantees a fixed pension, providing stability.
• Flexibility vs. Stability: NPS gives employees investment choices, balancing risk and growth. OPS, with fixed benefits, offers assured stability.
• Employer Liability: NPS reduces financial liability for employers by providing predictable contributions. OPS involves higher financial risks, as it creates long-term liabilities.

Which Pension Scheme is More Beneficial?

Selecting between NPS and OPS depends on multiple factors, including the business’s financial goals, workforce preferences, and market conditions. Here are some insights to help make an informed decision:

• Cost Efficiency: NPS is typically more cost-effective for businesses. The shared contribution model and market-linked growth can provide higher long-term benefits at a reduced liability compared to OPS.
• Employee Satisfaction: OPS often ensures higher satisfaction for employees due to the guaranteed benefits. Employees may prefer OPS for its assured monthly payouts, even if it means higher costs for the business.
• Risk Appetite: Businesses with a higher tolerance for market risk may prefer NPS, given its potential for growth. Conversely, OPS is suitable for businesses that prioritize guaranteed stability over growth.

How Businesses Should Decide on NPS vs. OPS

When determining which scheme to adopt, businesses should assess various parameters, such as:

• Long-Term Financial Impact: Calculate the financial commitment associated with both schemes, particularly with OPS’s guaranteed payout liability.
• Employee Demographics: Younger employees may prefer NPS due to its investment growth potential, while older employees may favor OPS for its reliability.
• Tax Benefits: Highlight the tax advantages of NPS contributions, which can benefit both employers and employees.

Ultimately, businesses need to balance their budgetary constraints with employee preferences to arrive at the best decision. Engaging with employees and considering their feedback is vital to determine a pension scheme that aligns with their expectations.

Conclusion

Choosing between NPS and OPS depends on a balance of factors—financial liabilities, growth potential, and employee satisfaction. While NPS offers flexibility and cost efficiency, OPS ensures stability and employee loyalty. Mithras Consultants is an independent actuarial and insurance consultancy firm providing qualitative financial and insurance solutions to its clients. We provide customized business solutions to clients and help them make the best possible decisions on their financial, insurance, and risk management matters.