Pension Reform in India: From the Old Pension Scheme to the National Pension System

The PFRDA Act, 2013 was the last step in a reform that took more than a decade. It began with concern about two problems: the rising, unfunded cost of government pensions, and the absence of any pension for the great majority of Indian workers. This note traces the history of pension reform in India from the Old Pension Scheme, through the expert reports and the 2003 notification, to the statute and the schemes that have followed.

1. The Old Pension Scheme

• Defined benefit: a government servant with qualifying service received a pension of about half of last pay (or average emoluments), with dearness relief to offset inflation, and a family pension on death.
• Non-contributory and unfunded: employees did not contribute to the pension itself (they saved separately in a General Provident Fund), and pensions were paid from current revenues, not from an invested fund.
• Rules: for Central Government servants, the Central Civil Services (Pension) Rules, 1972; States have their own rules.
• Narrow coverage: only government employees and a few others were covered; most workers in the unorganised sector had no pension.

2. Why Reform Was Needed

• Fiscal burden: the Central Government's pension expenditure grew rapidly. The CAG has recorded that pension liabilities rose from about 0.6 per cent of GDP in 1993-94 to 1.66 per cent in 2002-03, and spending from about Rs. 5,206 crore to Rs. 23,158 crore.
• Longevity and demography: longer life expectancy meant pensions were paid for more years, and the ageing of the population would increase the burden further.
• Intergenerational fairness: pay-as-you-go pensions pass the cost of today's retirees to future taxpayers.
• Coverage gap: the absence of any pension for most citizens called for a system open to all, not just government servants.

3. Expert Groups and Policy Decisions

• Project OASIS (Old Age Social and Income Security): commissioned by the Ministry of Social Justice and Empowerment in the late 1990s, it recommended a contributory, individual-account pension system for unorganised sector workers, with multiple fund managers and low costs.
• High Level Expert Group (2001 to 2002): set up in June 2001, it reported in February 2002 on a new pension system for government employees.
• Cabinet decision (August 2003): the Government approved a new defined contribution pension system for new Central Government employees.

4. The 2003 Notification and the Interim Regulator

• Interim PFRDA: set up by a Government resolution of 10 October 2003 (with a further resolution of 14 November 2008), to regulate and develop the new system pending legislation.
• Notification of 22 December 2003: the Ministry of Finance notified the new contributory pension system, which became mandatory for all new entrants to Central Government service (except the armed forces) joining on or after 1 January 2004.
• Contributions: initially 10 per cent of basic pay and dearness allowance from the employee, matched by 10 per cent from the Government; the Government's share was raised to 14 per cent from April 2019.
• Statutory recognition: Section 20(1) of the 2013 Act deems this system to be the National Pension System with effect from 1 January 2004.

5. The Long Road to Legislation

• Ordinance and first Bill: an ordinance to establish the regulator was promulgated in 2004, and a PFRDA Bill was introduced in 2005; the Bill was examined by a Parliamentary Standing Committee but lapsed with the dissolution of the Lok Sabha in 2009.
• Second Bill (2011): a fresh Bill was introduced in 2011, revised after the Standing Committee's report, including on foreign investment and a minimum return option.
• Passage (2013): the Lok Sabha passed it on 4 September 2013 and the Rajya Sabha on 6 September 2013; it became Act 23 of 2013.
• Commencement: the Act came into force on 1 February 2014, and the statutory PFRDA took over from the Interim Authority (Section 13).

6. Expansion of the System

• State Governments: most States adopted the NPS for their new employees by notification (now under Section 12(4)).
• All citizens (2009): the NPS was opened to all citizens on a voluntary basis from May 2009.
• NPS Lite and Swavalamban (2010): a low-cost version for unorganised sector workers, with a government co-contribution.
• Corporate sector (2011): a model for employers to offer the NPS to their employees.
• Atal Pension Yojana (2015): a guaranteed minimum pension scheme for unorganised workers, administered by PFRDA.
• NPS Vatsalya (2024): accounts opened by parents for minors, converting to regular NPS accounts at majority.
• Unified Pension Scheme (2025): an option under the NPS for Central Government employees, effective 1 April 2025, providing an assured payout of 50 per cent of the average basic pay of the last twelve months for full service.
• 2025 reforms: the Multiple Scheme Framework (from 1 October 2025) and amended exit and withdrawal regulations (December 2025) for non-government subscribers.

7. The Return of the Old Pension Scheme Debate

From 2022, several States announced a return to the Old Pension Scheme for their employees, and demands for its restoration grew among Central employees. The Central Government responded first with a one-time option for employees recruited against vacancies advertised before 22 December 2003 (an office memorandum of 3 March 2023), and then with the Unified Pension Scheme, which adds an assured element to the NPS rather than returning to an unfunded scheme.

8. Related Topics and Provisions

• Object, scope and scheme
• The National Pension System
• Unified Pension Scheme
• Old Pension Scheme versus NPS