Guaranteed Pension Scheme, Old Pension Scheme, and New Pension Scheme

The Union Finance Ministry has expressed interest in a new model put forth by the government of
Andhra Pradesh at a time when the nation is discussing the merits of the Old Pension System (OPS) vs
the New Pension Scheme (NPS). This topic assumes relevance for the Indian economy section of the
UPSC syllabus.

Guaranteed Pension Scheme (GPS)

The Chief Minister of Andhra Pradesh has proposed a new pension plan on which the Union
Government will debate.

• The Old Pension System (defined benefit) and the New Pension Scheme are both features of the
Andhra Pradesh Pension Plan, a unique pension concept (defined contribution).
• The program is also referred to as the "Guaranteed Pension Scheme" (GPS).
• The idea "is attractive," according to Union Finance Ministry officials, but it needs to be
thoroughly explored.

Guaranteed Pension Scheme Features

• Employees who pay a monthly contribution of 10% of their basic income and the state
government's matching 10% can receive a guaranteed pension under GPS equal to 33% of their
last received wage.
• And if they are willing to contribute a greater 14% of their monthly wage, which will be matched
by a 14% government contribution, they can receive a guaranteed pension of 40% of their last
drawn salary.
• It includes aspects of both the New Pension Scheme and the Old Pension System (defined
benefit) (defined contribution). In doing so, it provides two alternatives for "defined benefit"
and requests a monthly "defined contribution" from the employees.

Old Pension Scheme:

• The scheme guarantees a post-retirement income for life.

• Typically, the promised sum is equal to 50% of the last wage received.
• The cost of the pension is covered by the government. The program was abandoned in 2004.

New Pension Scheme:

• The government adopted NPS for use among its employees after it was initially created for
workers in the unorganized sector.
 • On December 22, 2003, NPS for Central Government employees was made known, and it
became a requirement for all new government hires beginning on January 1, 2004.
• A matching contribution from the government and 10% of the employee's base salary and
dearness allowance made up the defined contribution. The government's share of the basic pay
and dearness allowance increased to 14% in January 2019.

Guaranteed Pension Scheme Vs Old Pension Scheme Vs New Pension Scheme

Guaranteed Pension Scheme: Old Pension Scheme: New Pension Scheme:

• It is a Defined
Contribution Plan
offered to government
• It is a Defined Benefit
• It is a Defined Benefit Plan and private sector
Plan offered to
where the employer employees.
government employees
guarantees a fixed • Under this scheme, the
who joined service before
retirement benefit to an employee contributes a
January 1, 2004.
employee based on a pre- certain percentage of
• Under this scheme, the
determined formula that their salary towards the
employee is entitled to a
takes into account the pension fund, and the
fixed pension, which is
employee's salary and years employer also makes a
calculated based on their
of service. matching contribution.
length of service and the
• The employer bears the • The funds are then
average of their last 10
investment risk and is invested in various asset
months' salary before
responsible for ensuring classes, such as equities,
retirement.
that there are sufficient bonds, and government
• The government is
funds to pay the pension securities, based on the
responsible for funding the
benefit. employee's risk appetite.
pension and is required to
• It is typically offered to • At retirement, the
contribute a certain
government employees and employee can withdraw
percentage of the
some private companies in a portion of the corpus as
employee's salary towards
India. a lump sum, and the rest
the pension fund.
is used to purchase an
annuity that provides a
regular income stream.

Conclusion:
• The main differences between these schemes are in the way they are structured and managed.
The Guaranteed Pension Scheme and the Old Pension Scheme are Defined Benefit Plans, where
the benefit is fixed and guaranteed, and the employer is responsible for funding it.
• The New Pension Scheme is a Defined Contribution Plan, where the benefit depends on the
contributions made by the employee and the investment returns earned on those contributions,
and the employee bears the investment risk.
• Additionally, Guaranteed Pension Scheme and Old Pension Scheme are typically offered to
government employees, while New Pension Scheme is offered to both government and private
sector employees.