Concept of pension old and new pension fund

A pension fund is a type of retirement savings plan that provides a steady income stream to individuals in their golden years. There are two main types of pension funds: Old Pension Scheme (OPS) and New Pension Scheme (NPS). Let's dive into the details of each:

Old Pension Scheme (OPS)

The Old Pension Scheme was introduced in India in 1952 and was applicable to government employees, including central government employees, state government employees, and public sector undertakings (PSUs). The OPS is a defined benefit plan, which means that the employer (government) bears the investment risk and provides a guaranteed pension to the employee.

Key features of OPS:

  1. Defined benefit: The pension amount is calculated based on the employee's salary, length of service, and a fixed formula.
  2. Guaranteed pension: The employer guarantees a minimum pension amount, which is usually a percentage of the employee's last drawn salary.
  3. No contribution from employees: Employees do not contribute to the pension fund.
  4. No investment risk: The employer bears the investment risk, and the pension fund is managed by the government.

New Pension Scheme (NPS)

The New Pension Scheme was introduced in 2004 for all citizens of India, including government employees, private sector employees, and self-employed individuals. The NPS is a defined contribution plan, which means that the investment risk is borne by the individual.

Key features of NPS:

  1. Defined contribution: The pension amount is calculated based on the employee's contributions, employer's contributions (if applicable), and investment returns.
  2. No guaranteed pension: The pension amount is not guaranteed, and it depends on the investment returns.
  3. Employee contributions: Employees contribute a percentage of their salary to the pension fund.
  4. Investment risk: The individual bears the investment risk, and the pension fund is managed by the Pension Fund Regulatory and Development Authority (PFRDA).

Key differences between OPS and NPS

  1. Defined benefit vs. defined contribution: OPS is a defined benefit plan, while NPS is a defined contribution plan.
  2. Investment risk: OPS has no investment risk, while NPS has investment risk borne by the individual.
  3. Employee contributions: OPS has no employee contributions, while NPS requires employee contributions.
  4. Guaranteed pension: OPS provides a guaranteed pension, while NPS does not guarantee a pension amount.

In summary, the Old Pension Scheme is a traditional defined benefit plan that provides a guaranteed pension to government employees, while the New Pension Scheme is a defined contribution plan that requires employee contributions and bears investment risk.