Pre-Independence Pension System
The British started the pension system in India after the Indian struggle for independence in 1857. This was the reflection of the pension scheme then prevailing in Britain. But the provisions of this system discouraged the employees for creating a financial cover for their post-retirement life. So, confronting to all these problems, the Indian Pension Act 1871 replaced the Pension System of 1857.
Later, temporary increases were done regularly in pension to compensate the increasing prices (Inflation). The concept of dearness allowance also came in the light to satisfy the pensioners. But, like in most developing countries, there was no universal social security system to protect the elderly against economic deprivation.
The Royal Commission on Civil Establishments, in1881, first awarded pension benefits to the government employees. The Government of India Acts of 1919 and 1935 made further provisions. These schemes were later consolidated and expanded to provide retirement benefits to the entire working population of the public sector.
Post-Independence Pension System
Post-independence, several provident funds were set up to extend coverage to the private sector workers.
Today, major retirement schemes in India include provident fund, gratuity, and pension plans. The first two plans provide lump sum retirement benefit while the last one makes payment in the form of a monthly annuity. The following general features characterize these schemes i.e. they are mandatory, occupation based, earnings related, and have embedded insurance cover against disability and death.
Current Pension Products and Schemes
Provident Fund is a defined-contribution, fully funded benefit program providing lump sum benefit at the time of retirement. The provident fund system is the largest benefit program operating in India. It is consisting of the Employees’ Provident Fund (EPF) and a number of smaller provident funds. Together, the schemes provide retirement benefits to about 10 percent of the labor force. Workers (and private employers) contribute between 10 – 12 percent of monthly earnings, to be returned to the employee in a lump sum payment at retirement, including accumulated interest.
In 1995, the government partially converted the EPF scheme and introduced the Employees’ Pension Scheme (EPS). Additionally, workers in both public and private sectors receive the second tier of lump sum retirement benefit known as ‘Gratuity.’ It is paid to the workers who fulfill certain eligibility conditions like a minimum qualifying service period of five years.
For people in the lower end of the economic strata, there are several central as well as state government-run means-tested, targeted, social assistance programs and welfare funds.
The criteria for eligibility vary, but generally the destitute, the poverty stricken and the infirm, aged 60 years and above are provided a pension at rates ranging between Rs. 30 and Rs. 100 per month. However, the combined coverage of these social assistance schemes is insignificant and covers anywhere between 5 and 10 percent of the total elderly population. To widen the reach of the social safety net for the aged poor, the central government, in 1995, introduced a more comprehensive old age poverty alleviation program called the National Old Age Pension (NOAP) under the aegis of the National Social Assistance Program (NSAP). The scheme aims to provide monthly pension to thirty percent of the poorest elderly.
National Pension Scheme
On 1 January 2004, A contributory pension system was notified by the GOI which was named as “NATIONAL PENSION SYSTEM.” The NPS was subsequently extended to all citizens of the country with effect from 1 May 2009. This included self-employed professionals and others in the unorganized sector on a voluntary basis.
Unlike traditional financial products where all the functions (sales, operations, service, fund management, depository) are done by one company, NPS follows an unbundled architecture where each step of the value chain has been made disjointed from the other.
This unbundling not only allows the customer to mix and match his providers of service through the value chain, picking the best-suited option, but it also curbs the incidence of miss-selling. The benefit of such a pension regime is likely to foster aggregate rate of savings and accelerate capital market development. Despite all these excellent initiatives, there is still a lot that needs to be done. This is actually the grand generation for whom once pt. Jawaharlal Nehru said “the real pillars of our economy- with whose blessings the economy flourishes.”