The Union Cabinet’s approval of the Unified Pension Scheme (UPS) marks a significant shift in India’s pension landscape, particularly for government employees. The UPS guarantees that employees will receive 50% of their average basic salary from the last 12 months of service as a pension, provided they have served for at least 25 years. This scheme blends aspects of the Old Pension Scheme (OPS) with the more recent National Pension System (NPS), offering a defined benefit pension while retaining the contributory elements of the NPS.
Key features include an assured family pension, inflation indexation, and a minimum pension of ₹10,000 per month for those with at least 10 years of service. The scheme also offers a lump sum payment on superannuation, which does not reduce the assured pension amount. While it currently applies to central government employees, the UPS could be extended to state government employees if adopted by state governments.
The UPS addresses long-standing dissatisfaction with the NPS, which lacked assured returns and required employee contributions, unlike the OPS. The scheme represents a compromise, aiming to balance fiscal responsibility with employee benefits, and reflects the government’s responsiveness to employee demands.
The Good
- Assured Benefits: The UPS ensures government employees have financial security post-retirement with a guaranteed pension equal to 50% of their average basic salary from the last year of service. This predictability contrasts with the uncertainty of the NPS and will likely lead to greater satisfaction among retirees.
- Inclusivity and Flexibility: The scheme covers all central government employees, with the potential to include state government employees if adopted. It offers flexibility by allowing employees to choose between the NPS and the UPS, catering to different risk appetites and financial needs.
- Protection for Families: In the event of an employee’s death, their spouse is assured a family pension at 60% of the employee’s pension. This provides a safety net for families, ensuring they are not left financially vulnerable.
- Inflation Protection: The UPS includes mechanisms for inflation indexation, which ensures that pensions maintain their value over time despite rising living costs. This feature is crucial for retirees relying on fixed incomes.
- Lump Sum Benefits: The scheme offers a lump sum payment upon retirement, adding a financial cushion for retirees. This could be used for various purposes, such as settling debts or making significant purchases, enhancing the overall retirement experience.
- Potential Expansion: While the UPS currently applies to central government employees, its potential extension to state employees means a wider population could benefit. This could lead to more uniform pension benefits across the country, reducing disparities between central and state employees.
The Bad
- Fiscal Strain: The UPS, like the OPS, could impose a significant fiscal burden on the government. The guaranteed pensions and other benefits may strain public finances, especially if the scheme is adopted by state governments as well. This could lead to higher taxes or reduced government spending in other areas.
- Lack of Flexibility in Retirement Planning: While the UPS offers assured benefits, it may lack the flexibility of the NPS, which allows employees to choose from various investment schemes. For employees who prefer more control over their retirement savings and are willing to take on some risk, the UPS might seem less attractive.
- Potential for Inequality: If only some states adopt the UPS while others stick with the NPS, disparities in retirement benefits could emerge between state and central government employees, as well as among employees in different states. This could lead to dissatisfaction and calls for uniformity.
- Administrative Challenges: Implementing the UPS will require significant administrative effort, particularly in adjusting the arrears for those who have already retired under the NPS. The transition process could be complex and time-consuming, leading to potential delays in benefits for some retirees.
- Long-term Sustainability Concerns: While the UPS addresses current dissatisfaction with the NPS, its long-term sustainability remains a concern. The guaranteed nature of the benefits, coupled with inflation adjustments, could make the scheme financially unsustainable in the long run, particularly in the face of demographic changes such as an ageing population.
- Employee Choice Dilemma: The option to choose between the NPS and UPS may create confusion among employees, particularly those who are not financially savvy. The irreversible nature of the choice could lead to regrets if an employee later finds that their chosen scheme does not meet their needs.
The Take
The Union Cabinet on Saturday (August 24) approved the Unified Pension Scheme (UPS), ensuring government employees receive 50 per cent of their salary as pension. The scheme is expected to benefit around 230,000 central government employees, with the potential to expand to 900,000 if state governments adopt the scheme, extending its benefits to more government employees across India.Additionally there will be an option for employees to choose between the existing National Pension System (NPS) and the new UPS.
A committee had been formed by the Centre, which conducted 100 meetings with top organisations, including the Reserve Bank of India (RBI) and the World Bank, to finalise the scheme’s framework.the Department of Expenditure (DoE) within the Ministry of Finance is likely to release an operational framework for the implementation of the UPS. This framework will outline procedures for various situations, such as for those who retired under the NPS and made partial withdrawals from their annuity.
What is the Unified Pension Scheme?
The UPS aims to balance fiscal policy with employee benefits. It combines a defined benefit pension similar to the Old Pension Scheme (OPS) with the contributory nature of the NPS.
- Assured Pension: Government employees with at least 25 years of service will receive a guaranteed pension equal to 50 per cent of their average basic pay from the last 12 months before retirement. Those with fewer years of service will receive a pension proportional to their tenure, with the minimum qualifying service set at 10 years.
- Assured family pension: In the unfortunate event of an employee’s death, their spouse will receive a family pension amounting to 60 per cent of the pension the employee was receiving.
- Assured minimum pension: Employees with a minimum of 10 years of service will be entitled to a minimum pension of Rs 10,000 per month upon retirement.
- Inflation indexation: Both the assured pension and family pension will be adjusted for inflation, ensuring they keep pace with rising prices.
- Dearness relief:Retirees under the UPS will receive Dearness Relief based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to current employees.
- Lump sum payment on superannuation: In addition to gratuity, employees will receive a lump sum payment at retirement, equivalent to 1/10th of their monthly emoluments (including pay and Dearness Allowance) for every six months of service completed. This payment will not reduce the amount of the assured pension
Similarities between UPS and Old Pension Scheme
In recent years, political opposition parties have capitalised on the dissatisfaction among government employees regarding the National Pension Scheme (NPS), commonly referred to as the new pension scheme. This discontent has led to Congress-led governments in Himachal Pradesh (2023), Rajasthan and Chhattisgarh (2022), as well as the AAP government in Punjab (2022), reinstating the Old Pension Scheme (OPS).
The OPS provided government employees at both central and state levels with a pension set at 50 per cent of their last drawn basic pay, similar to the proposed UPS. Additionally, Dearness Relief, calculated as a percentage of the basic salary, was included to compensate for the rising cost of living.
How does UPS differ from the new pension scheme?
The NPS, introduced on January 1, 2004, by the Atal Bihari Vajpayee government, replaced the OPS to address its fiscal unsustainability. The NPS differs from the OPS in two key aspects: it eliminates the assured pension and is funded through contributions from both the employee and the government.
Employees contribute 10 per cent of their basic pay and Dearness Allowance, while the government contributes 14 per cent (now proposed to be increased to 18.5 per cent). Under the NPS, employees can choose from a variety of schemes, ranging from low to high risk, managed by nine pension fund managers, including those sponsored by SBI, LIC, and HDFC.
Government employees have opposed the NPS because it offers lower assured returns and requires employee contributions, unlike the OPS. Persistent demands for the OPS led to the formation of a committee under Finance Secretary T V Somanathan in 2023, which conducted over 100 meetings to develop recommendations that culminated in the UPS.
What is the eligibility for the Unified Pension Scheme?
UPS applies to all those who retired under the NPS from 2004 onwards. Somanathan stated that these retirees would have their arrears adjusted with what they have already drawn under the NPS. Employees can choose to remain under the NPS, but it is unlikely to be beneficial. Once an option is selected, it cannot be changed.
Currently, the scheme applies to central government employees, though states may adopt it as well.
