Old Pension Scheme
Also written OPS · Old Pension Scheme (OPS)
The unfunded, pay-as-you-go defined benefit pension for government employees who joined before 1 January 2004, paying 50 per cent of last drawn salary plus dearness relief out of the budget.
In plain language
The Old Pension Scheme is the name popularly given to the pension that Central and State Government employees who joined service before 1 January 2004 receive.
It is a defined benefit scheme: the pension is known in advance and depends on the last drawn salary, not on any contributions or returns. And it is unfunded — there is no dedicated investment corpus behind it. Today's pensions are paid out of today's government budget.
Those two facts — a promise fixed in advance and nothing set aside to pay for it — are the whole story of why it was replaced by the NPS.
How it works
The benefit. A pension equal to 50 per cent of last drawn salary, plus dearness relief, paid each year out of the government's budget.
Funded versus unfunded DB (Chapter 1, section 1.1.1):
| Funded DB | Unfunded (pay-as-you-go) DB | |
|---|---|---|
| Corpus | Contributions set aside and invested during working life | None built in advance |
| Who pays today's pensions | The accumulated corpus | The employer's current revenue or budget |
| Example | — | OPS |
Why it became unviable. By the late 1990s pension outgo was rising well ahead of revenue, driven by rising life expectancy, periodic pay commission awards, and more retirees relative to the working population; for some states committed pension expenditure was consuming a large and rising share of revenue receipts. A committee chaired by S.A. Dave, set up in 1998, produced the Project OASIS Report in 2000, recommending funded, defined-contribution, portable individual accounts.
What replaced it. Central Government employees (except armed forces) joining on or after 1 January 2004 are enrolled in the NPS, a DC plan: 10 per cent of Basic + DA from the employee and 14 per cent from the government. From 1 April 2025 eligible employees may instead opt for the Unified Pension Scheme, which restores an assured payout inside the NPS architecture.
A worked example
Three central government officers retire on the same day with the same last drawn basic pay of Rs 1,00,000 a month. The pay figure is illustrative; the rules are the workbook's.
| OPS (joined 2002) | UPS (joined 2005, opted in) | NPS (joined 2005, did not opt) | |
|---|---|---|---|
| Basis | 50% of last drawn salary | 50% of average basic pay of last 12 months, for 25+ years' service | Whatever the corpus buys |
| Monthly pension | Rs 50,000 + dearness relief | About Rs 50,000 if the last 12 months averaged Rs 1,00,000 | Not known in advance |
| Employee contribution | None stated | 10% of Basic + DA | 10% of Basic + DA |
| Government contribution | None — paid from budget | 10% to PRAN + 8.5% to pool corpus | 14% |
| Corpus behind it | None | Individual corpus + pool corpus | Individual corpus |
| Longevity and investment risk | Government | Government, for the assured part | Employee |
The OPS officer's pension costs the government nothing until the day he retires — and then costs it every year for the rest of his life, from revenue raised that year. Multiply by lakhs of retirees living longer after each pay commission, and the fiscal concern Chapter 1 describes follows directly.
Why NISM asks about it
Chapter 1, section 1.1.1 (Transition from Defined Benefit to Defined Contribution), names the OPS, explains funded versus unfunded DB, and sets out the Project OASIS history. Chapter 4, section 4.1.2, describes the government's move from DB to DC through the Government model, and section 4.1.6 covers the UPS. Chapter 6, section 6.1, gives the 10 per cent / 14 per cent NPS contributions and the UPS option. Expect questions on the 1 January 2004 cut-off, the unfunded nature of the OPS, and who bears the risk under each design.
Common exam traps
- The cut-off is 1 January 2004 — joined before, OPS; joined on or after, NPS. Armed forces are excepted from the NPS.
- The OPS is unfunded. It is DB, but not every DB scheme is unfunded — a funded DB scheme builds a corpus.
- 50 per cent of last drawn salary (OPS) is not the same basis as the UPS, which uses the average basic pay of the last 12 months and needs 25 years for the full 50 per cent.
- The UPS is not a return to the OPS. It runs inside the NPS architecture, with employee contributions and a corpus.
- Project OASIS recommended DC, not a better-funded DB. Committee 1998, report 2000, chaired by S.A. Dave.
- In DB the longevity risk sits with the employer; in DC it moves to the employee.
Check yourself
1.X invests Rs 5,000 a month from age 25 to 35 at 8% and then stops, leaving the corpus untouched to age 60, reaching Rs 62,65,000. Y invests Rs 5,000 a month from age 35 to 60 at 8%, reaching Rs 47,55,000. What does this demonstrate?
- a)Ten years of early contributions can beat twenty-five years of later ones, because the money had more time to compound
- b)Y made an arithmetic error, since contributing for longer must always produce more
- c)X benefited from a higher rate of return than Y
- d)The difference arises entirely from inflation eroding Y's later contributions
Show the answer
Answer: (a) Ten years of early contributions can beat twenty-five years of later ones, because the money had more time to compound
⚠️ "X's corpus is worth MORE than Y's corpus EVEN THOUGH HE CONTRIBUTED FOR JUST 10 YEARS, because of the COMPOUNDING EFFECT OF MONEY WITH TIME. Y's corpus DID NOT GROW AS MUCH EVEN THOUGH HE INVESTED FOR 25 YEARS BECAUSE THE MONEY DID NOT HAVE AS MUCH TIME TO COMPOUND AND GROW."
X contributed Rs 6,00,000 in total and ended with Rs 62,65,000. Y contributed Rs 15,00,000 — two and a half times as much — and ended with Rs 47,55,000.
Option (c) is wrong on the facts: both earned 8%. Option (d) misattributes the cause — no inflation adjustment is applied to either figure.
The mechanism: X's early money enjoyed 35 years of compounding; Y's first rupee enjoyed only 25 and his last almost none. As the workbook puts it, "for compounding to work, the investment must be given ADEQUATE TIME to earn returns, these returns have to be REINVESTED, and the cumulative amount to earn returns OVER MANY CYCLES."
2.In what order should a pre-retiree repay outstanding debt?
- a)The home loan first, since it is the largest
- b)Highest cost to lowest — credit card and personal loans first, so they stop draining available income
- c)Whichever has the shortest remaining tenure
- d)All equally, in proportion to the amount outstanding
Show the answer
Answer: (b) Highest cost to lowest — credit card and personal loans first, so they stop draining available income
The second step of the debt assessment is explicit: ⚠️ "RANK THE DEBT FOR REPAYMENT IN ORDER OF HIGHEST COST TO LOWEST."
And the application follows: ⚠️ "PAYING OFF THE HIGH COST DEBT SUCH AS CREDIT CARD AND PERSONAL LOAN SHOULD BE DONE FIRST SO THAT IT STOPS DRAINING THE AVAILABLE INCOME."
The mortgage is not ignored, only ranked lower: "Attention should also be paid to the OUTSTANDING MORTGAGE, THOUGH TYPICALLY IT IS A LOW COST LOAN." If its repayment was part of the original financial plan, funds will have been accumulated; otherwise increase repayment from additional savings so that the individual is DEBT-FREE IN RETIREMENT.
The full three-step assessment: ⚠️ list the debt with amount outstanding, interest rate and nature · rank highest cost to lowest · make a plan to pay it down.
And where the money should come from: ⚠️ "Repaying loans should IDEALLY BE MADE FROM ADDITIONAL SAVINGS IN THE PRE-RETIREMENT STAGE as far as possible RATHER THAN FROM REDEEMING OR SELLING INVESTMENTS ACCUMULATED FOR OTHER GOALS, PARTICULARLY RETIREMENT."
3.From whom may a Retirement Adviser receive remuneration in respect of NPS advice?
- a)From the pension fund whose scheme is recommended
- b)Only from the prospect or subscriber being advised, and from no one else
- c)From the Point of Presence with which the adviser has a tie-up
- d)From any party, provided the payment is disclosed
Show the answer
Answer: (b) Only from the prospect or subscriber being advised, and from no one else
⚠️ "A RETIREMENT ADVISER SHALL NOT RECEIVE ANY CONSIDERATION BY WAY OF REMUNERATION OR COMPENSATION OR IN ANY OTHER FORM FROM ANY PERSON OTHER THAN THE PROSPECT/SUBSCRIBER BEING ADVISED, in respect of National Pension System or other pension scheme regulated by the Authority."
Note the width of "or in any other form" — it catches gifts and hospitality, not just commission.
⚠️ Option (d) is the sophisticated trap. Disclosure is required — "a retirement adviser shall DISCLOSE TO ITS PROSPECT ANY CONSIDERATION... RECEIVED OR RECEIVABLE BY IT" — but disclosure does not cure a prohibited payment. The rule is a prohibition, not a disclosure obligation.
The companion prohibition: ⚠️ "A RETIREMENT ADVISER SHALL NOT COLLECT ANY AMOUNT IN CASH FOR INVESTMENT/CONTRIBUTION TO THE PENSION ACCOUNT OF THE SUBSCRIBERS."
Together these define the fiduciary position: one removes the incentive to prefer one pension fund over another, the other keeps the adviser's hands off the subscriber's money. The adviser may still tie up with any number of PoPs — there is no restriction on the number — provided subscriber interests are not adversely affected.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Longevity riskThe risk that a person outlives their retirement assets — living longer than the plan assumed, so the corpus runs out while income is still needed.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- Unified Pension SchemeAn option under the NPS for Central Government employees, effective 1 April 2025, that adds an assured payout of 50 percent of the last 12 months' average basic pay after 25 years of qualifying service.
- Defined Benefit (DB) schemeA retirement scheme where the pension amount is fixed in advance, usually as a percentage of last-drawn salary, regardless of how the underlying investments perform.
- Defined Contribution (DC) schemeA retirement scheme where the contribution amount is fixed but the eventual pension is not — it depends entirely on the returns earned on the invested corpus.
- Life expectancyThe average period a person is expected to live, based on birth and death statistics. In India it rose from 58 years in 1990 to 72 in 2024 — good news that creates longevity risk for retirement.
- Project OASIS ReportThe 2000 report of the S.A. Dave committee on old-age income security, which recommended moving India from unfunded defined-benefit pensions to funded individual accounts — the design the NPS was built on.