16 Feb 2026·Source: The Indian Express

4 min

EconomyPolity & GovernanceNEWS

Funded Pension System is Essential for Fiscal Health of States

S. Ramann emphasizes funded pension accounts' necessity for states' fiscal sustainability.

In an interview, S. Ramann, Chairman of the Pension Fund Regulatory and Development Authority (PFRDA), stated that the Old Pension Scheme (OPS) is unsustainable for states. He stressed the importance of a funded pension account concept, where money is set aside regularly to meet pension obligations.

He noted that some states are reverting to OPS, which puts a strain on their finances. According to Ramann, the concept of a funded pension account is essential for ensuring that future pension liabilities are met without burdening the state's resources. He also mentioned that the PFRDA is working on improving the National Pension System (NPS) to make it more attractive to subscribers.

Key Facts

The Old Pension Scheme (OPS) is unsustainable for states.

A funded pension account is essential for fiscal health.

Some states are reverting to OPS, straining finances.

S. Ramann, Chairman of PFRDA, advocates for funded pensions.

UPSC Exam Angles

GS Paper III (Economy): Government Budgeting, Fiscal Policy

Connects to social security schemes and financial inclusion

Potential for statement-based questions on pension reforms

In Simple Words

The government needs money to pay pensions to retired employees. If they don't save enough beforehand, it puts a strain on the state's finances. A funded pension system is like saving regularly, so the money is available when needed.

India Angle

Many state governments in India are struggling to balance their budgets. Paying pensions from current revenue, as in the Old Pension Scheme, can take away funds needed for development and welfare programs.

For Instance

Think of it like saving for your child's education. If you start a savings account early, you'll have the money when they need it for college. If you don't, you might have to take out a big loan.

If the government's finances are strained, it can affect the services you rely on, like roads, schools, and healthcare. A well-funded pension system helps ensure these services are not compromised.

Save today for a secure tomorrow: A funded pension system ensures a stable future for everyone.

Visual Insights

Key Highlights from PFRDA Chairman's Interview

Key takeaways from S. Ramann's interview on the importance of a funded pension system and the unsustainability of the Old Pension Scheme (OPS) for states.

Focus on Funded Pension Account: Essential
OPS Unsustainable for States: True

More Information

Background

The concept of pensions has evolved significantly over time. Historically, many countries relied on unfunded, or 'pay-as-you-go' systems, where current workers' contributions paid for the pensions of retirees. However, demographic shifts and increasing life expectancies have made these systems unsustainable. This has led to the rise of funded pension systems, like the National Pension System (NPS) in India, where contributions are invested to generate returns for future pension payouts. The shift towards funded pension systems is also linked to broader economic reforms and the need for fiscal discipline. The Fiscal Responsibility and Budget Management (FRBM) Act, for example, encourages governments to manage their liabilities effectively. Funded pension systems help in this regard by creating dedicated pools of assets to meet future obligations, rather than relying solely on current revenues. This approach promotes long-term fiscal sustainability and reduces the burden on future generations. In India, the regulatory framework for pensions is primarily governed by the Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013. This act established the PFRDA as the regulator for the pension sector, with the mandate to promote, develop, and regulate pension schemes. The NPS, a key component of India's pension system, is designed to provide retirement income to all citizens, including those in the unorganized sector. The PFRDA oversees the functioning of the NPS and ensures that pension funds are managed prudently.

Latest Developments

Several states in India have recently considered reverting to the Old Pension Scheme (OPS), which is an unfunded system. This move has sparked debate about the long-term fiscal implications for these states. The Reserve Bank of India (RBI) has cautioned against reverting to OPS, highlighting the potential strain on state finances and the risk of accumulating unsustainable liabilities. The Pension Fund Regulatory and Development Authority (PFRDA) is actively working to enhance the attractiveness of the National Pension System (NPS). These efforts include simplifying the enrollment process, increasing investment options, and improving the overall subscriber experience. The goal is to encourage greater participation in the NPS and ensure that more individuals have access to a secure retirement income. The PFRDA is also exploring ways to make the NPS more flexible and adaptable to the needs of different segments of the population. Looking ahead, the focus is on strengthening the pension system and promoting financial literacy among citizens. This includes raising awareness about the benefits of long-term savings and the importance of planning for retirement. The government is also considering measures to expand the coverage of the NPS to include more informal sector workers and other vulnerable groups. The long-term sustainability of the pension system is crucial for ensuring the financial security of future generations and supporting economic growth.

Frequently Asked Questions

1. What is a funded pension system, and why is it important for states' fiscal health?

A funded pension system involves setting aside money regularly in a dedicated account to meet future pension obligations. It is important because it ensures that states can meet their pension liabilities without straining their current resources, promoting long-term fiscal sustainability.

2. How does the Old Pension Scheme (OPS) differ from a funded pension system like the National Pension System (NPS)?

The Old Pension Scheme (OPS) is an unfunded system where current workers' contributions pay for the pensions of retirees. In contrast, the National Pension System (NPS) is a funded system where contributions are invested to grow over time, ensuring that funds are available when the employee retires.

3. Why is the Old Pension Scheme (OPS) considered unsustainable for states in the long run?

The Old Pension Scheme (OPS) is considered unsustainable because it places a direct burden on the state's current revenue. Demographic shifts and increasing life expectancies make it difficult for states to meet increasing pension obligations without straining their finances.

4. What are the potential fiscal consequences for states reverting to the Old Pension Scheme (OPS)?

Reverting to the Old Pension Scheme (OPS) can strain state finances, leading to unsustainable liabilities. This can divert funds from other essential sectors like healthcare, education, and infrastructure development.

5. What is the role of the Pension Fund Regulatory and Development Authority (PFRDA)?

The Pension Fund Regulatory and Development Authority (PFRDA) regulates and develops the pension sector in India. It promotes and ensures the orderly growth of pension funds, protecting the interests of subscribers.

6. According to S. Ramann, what is essential for ensuring that future pension liabilities are met?

S. Ramann, Chairman of the PFRDA, emphasizes that the concept of a funded pension account is essential for ensuring that future pension liabilities are met without burdening the state's resources.

7. What are the recent developments regarding states and the Old Pension Scheme (OPS)?

Several states in India have recently considered reverting to the Old Pension Scheme (OPS), sparking debate about the long-term fiscal implications. The Reserve Bank of India (RBI) has cautioned against this move, highlighting the potential strain on state finances.

8. What steps is the PFRDA taking to improve the National Pension System (NPS)?

The PFRDA is working on improving the National Pension System (NPS) to make it more attractive to subscribers. Specific improvements are not detailed in the provided context.

9. How might the shift towards funded pension systems impact common citizens?

Funded pension systems aim to ensure that retirees receive their pension benefits without burdening future generations. This can lead to greater financial security in retirement, but also requires individuals to take more responsibility for their retirement savings.

10. What are the key facts to remember about the pension schemes for the UPSC Prelims exam?

Key facts include: the difference between OPS and NPS, the role of PFRDA, and the potential fiscal impact of OPS on states. Understanding the concept of funded vs. unfunded pension systems is crucial.

Practice Questions (MCQs)

1. Which of the following statements is/are correct regarding the National Pension System (NPS)? 1. NPS is regulated by the Reserve Bank of India (RBI). 2. NPS aims to provide retirement income to all citizens of India. 3. Under NPS, contributions are invested to generate returns for future pension payouts.

A.1 only
B.2 and 3 only
C.1 and 3 only
D.1, 2 and 3

Show Answer

Answer: B

Statement 1 is INCORRECT: The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), not the RBI. Statement 2 is CORRECT: The NPS aims to provide retirement income to all citizens of India, including those in the unorganized sector. Statement 3 is CORRECT: Under NPS, contributions are invested in various assets to generate returns for future pension payouts. This is a key feature of a funded pension system.

2. Consider the following statements regarding the Old Pension Scheme (OPS) and the New Pension Scheme (NPS): 1. OPS is a defined benefit scheme, while NPS is a defined contribution scheme. 2. Under OPS, the pension amount is predetermined and based on the last drawn salary. 3. NPS contributions are invested in market-linked instruments, offering potentially higher returns but also carrying investment risk. Which of the statements given above is/are correct?

A.1 only
B.2 and 3 only
C.1 and 3 only
D.1, 2 and 3

Show Answer

Answer: D

Statement 1 is CORRECT: OPS is a defined benefit scheme, meaning the pension amount is predetermined. NPS is a defined contribution scheme, where the pension depends on the contributions made and the investment returns. Statement 2 is CORRECT: Under OPS, the pension amount is typically a percentage of the last drawn salary. Statement 3 is CORRECT: NPS contributions are invested in market-linked instruments, which can offer higher returns but also involve investment risk.

3. Which of the following is NOT a function of the Pension Fund Regulatory and Development Authority (PFRDA)?

A.To promote the development of the pension sector.
B.To regulate pension schemes in India.
C.To manage the investment of pension funds.
D.To protect the interests of subscribers of pension schemes.

Show Answer

Answer: C

The PFRDA's functions include promoting the development of the pension sector, regulating pension schemes, and protecting the interests of subscribers. However, the PFRDA does not directly manage the investment of pension funds. This is typically done by pension fund managers who are regulated by the PFRDA.

Source Articles

Old Pension Scheme unsustainable for states; concept of funded pension account essential: PFRDA Chairperson Sivasubramanian Ramann | Business News - The Indian Express

The Indian Express·16 Feb 2026