Project OASIS Report

The NPS did not appear out of nowhere. It came out of a report.

By the late 1990s India had two problems at once. Government pensions were unfunded — today's retirees were paid out of today's budget, with no corpus behind the promise. And almost nobody in the unorganised sector had any pension at all.

In 1998 the Ministry of Social Justice and Empowerment set up a committee chaired by S.A. Dave to look at old-age income security in India. Its report, submitted in 2000, is the Project OASIS Report — Old Age Social and Income Security.

It recommended a different architecture. Stop promising a benefit and start funding an account. Give each person a portable account of their own. Let competing managers invest the money, including in equity. And split the jobs of record-keeping, fund management and paying the pension between separate entities.

Read that list next to the NPS and you are reading the same design.

The problem the committee was handed. Pension outgo for the Union and State Governments was rising well ahead of revenue growth, driven by rising life expectancy, periodic pay commission awards, and a growing number of retirees relative to the working population. For some states, committed pension expenditure alone was consuming a large and rising share of revenue receipts. The model under strain was the unfunded, pay-as-you-go Old Pension Scheme, which applied to Central and State Government employees who joined before 1 January 2004 and paid a pension equal to 50 percent of last drawn salary plus dearness relief, straight out of the budget, with no dedicated investment corpus behind it.

Alongside that sat the coverage gap the committee was specifically asked about: the near-total absence of pension coverage for the unorganised sector.

What it recommended. The report proposed moving away from unfunded DB promises towards a funded, defined-contribution architecture, with four features:

1. Individual, portable accounts.
2. A choice of competing pension fund managers.
3. Investment across asset classes including equity, rather than only fixed-return instruments.
4. A clear separation of record-keeping, fund management and annuity functions.

What became of each. Every one of the four is visible in the NPS. The individual account is the PRAN. The choice of managers is the panel of registered pension funds. Equity appears as asset class E in the scheme choices. And the fourth recommendation is the unbundled architecture — a separate Central Recordkeeping Agency for records, pension funds for investment, and empanelled Annuity Service Providers for the pension itself.

The NPS that followed applies to Central Government employees who joined on or after 1 January 2004 and is a defined contribution plan.

Put two government employees side by side. The date they joined is the only difference that matters.

Mr Sharma joined in 1999, before the cut-off. He is on the unfunded Old Pension Scheme. On a last drawn salary of Rs 80,000 a month, his pension is 50 percent of it — Rs 40,000 a month, plus dearness relief, paid out of the government's budget every year for as long as he lives. No corpus was ever built for him. If he lives to 90, the budget pays for 30 years.

Ms Sharma joined in 2005, after it. She is on the NPS, the architecture Project OASIS recommended. Each month 10 percent of her basic pay and dearness allowance goes into her own account, and the government adds 14 percent. The money is invested by a pension fund she chooses, across asset classes including equity, and every rupee is recorded against her PRAN by the CRA.

What changed for the employer, in one line: Mr Sharma is a promise on the budget; Ms Sharma is a funded account. The government's liability for her ends when it pays its 14 percent.

What changed for the employee: Mr Sharma knows his pension and carries no investment risk. Ms Sharma does not know her pension and carries the investment and longevity risk herself — which is the trade the report was recommending, with portability and a market return offered in exchange.

Chapter 1, section 1.1.1 (Transition from Defined Benefit to Defined Contribution), tells this history in a single dense paragraph, and it is a favourite for recall questions because every element is a name, a year or a number.

Expect: which committee examined old-age income security in India (the committee chaired by S.A. Dave, set up in 1998 by the Ministry of Social Justice and Empowerment), in which year was the OASIS report submitted (2000), what does OASIS stand for (Old Age Social and Income Security), and what did it recommend (a funded defined-contribution architecture with individual portable accounts, competing fund managers, equity exposure, and separation of record-keeping, fund management and annuity functions). The 1 January 2004 cut-off between OPS and NPS is examined alongside it.

• Set up in 1998, reported in 2000. Two dates, and questions use both. The NPS start date for Central Government employees is a third: 1 January 2004.
• The Ministry of Social Justice and Empowerment set up the committee, not the Ministry of Finance — a detail the workbook states and options exploit.
• OASIS is Old Age Social and Income Security. Not "old age savings" and not an acronym for the scheme itself; it was the name of the project, not of a pension product.
• It recommended equity exposure, not merely more saving. The specific recommendation was investment across asset classes including equity, rather than only fixed-return instruments — that is what made competing fund managers necessary.
• The separation of functions is a recommendation, not an accident of administration. It is the origin of the unbundled architecture, and the cleanest way to explain why the CRA, the pension funds and the ASPs are different entities.
• The committee was asked about the unorganised sector. Candidates remember the fiscal motive and forget the coverage motive; the workbook gives both.