UPS vs NPS: NPS could have been a million times better than Unified Pension Scheme, where did the mistake happen?

The government recently announced a new scheme called the Unified Pension Scheme (UPS), which is a modification of the National Pension System (NPS) meant exclusively for government employees. Clearing away the cloud of rhetoric surrounding the new scheme, it brings back guarantees in retirement pensions for government employees. At a theoretical level, this new guaranteed pension is optional and employees can opt for NPS as well. But from a practical perspective, it is the end of NPS for government employees.

This is a simple truth. Had the NPS been implemented in the spirit in which it was designed in 2004, pre-2004 government employees (who are still on the old system) would have been agitating to get transferred to NPS. Why? They would have realized by now that NPS will easily give 300-400 percent more pensions than the old pension system!

In concept, NPS works brilliantly. But only if a large portion of the money is invested in equities. In other words, if the massive growth of the Indian economy was channeled through the stock markets into the NPS and then into pensions, pensions would be much, much higher. In 2004, when new government employees were enrolled in the NPS, the Sensex was around 5,000. Today, it is around 80,000. But all of this was a waste and a waste in the case of pensions.

It was a waste in two ways. First, from 2004 to 2009, the equity investment part of the NPS was not implemented at all. The money was sitting on normal government securities. Then, after that, the maximum equity exposure was set at a ridiculous 15 percent by default. This unfounded but institutionalized fear of equities killed any chance of NPS being of any benefit.

I am sure there are still some government employees, however few; For those who understand all this, NPS is a simple option to earn returns that will give them a much higher pension than UPS. Once your money is invested in NPS, you can directly access your account on the CRA website and choose the option with the highest equity. Ideally, this should have been done at least by the age of 50 and ideally, this should have been the default option.

If one analyses the fundamental reasons why all this happened, the current state of politics and the mindset of government employees should also be blamed. However, what's done is done; there is no point in creating these alternative scenarios of history now.

As for the non-government members of NPS, the lesson is clear: NPS is an excellent retirement system. But to get the maximum benefit, the equity component must be kept as high as possible for as long as possible. Of course, this applies to every long-term investment, not just NPS.