OPS vs NPS explained: RBI cautions states over old pension scheme

The Reserve Bank of India has cautioned the states that have implemented the old pension system, saying that they risk unfunded pension liabilities in the near future. Writing in a report on state finance,  they said the states can't postpone current expenses to the future.  

"The annual saving in fiscal resources that this move entails is short-lived. By postponing current expenses to the future, states risk accumulation of unfunded pension liabilities in the coming years," they said in the report. 

What's the old pension scheme? Under the old pension scheme, the state government used to pay their employees a pension that is equal to 50 percent of the last drawn salary. Himachal Pradesh, Jharkhand, Punjab, Chhattisgarh and Rajasthan use this pension system. The old system put a burden on the state exchequer.

The National Pension Scheme was brought by the Manmohan Singh government in 2004. Under this, employees pay 10 percent of their salaries for the pension fund; an equal amount of money will be paid by the employers. This fund will be used to pay pensions to the employees. The pension will depend on the accumulated corpus. 

The RBI said the states should focus on higher capital expenditures as this would benefit the GDPs of the states. It said they should create buffer funds to keep spending on capital expenditure even during the times of economic slowdown. It said the states should spend in the fields of health, education, infrastructure and green energy. 

Himachal Pradesh is the latest state that decided to revert to the old pension scheme. 

Under the old pension system, pensions increase when inflation prompts an increase in the dearness allowance. 

Recently, the Delhi High Court ruled that the Central Armed Police Force (CAPF) will keep getting the benefits of the old pension system.