On Saturday, August 24, the Union Cabinet approved the Unified Pension Scheme (UPS), which will offer government employees a fixed pension post-retirement. This new scheme, effective from April 1, 2025, represents a significant change from the current New Pension Scheme (NPS).
The introduction of the UPS comes in response to significant dissatisfaction among government employees with the NPS. Opposition-ruled states such as Himachal Pradesh (in 2023), Rajasthan (in 2022), Chhattisgarh (in 2022), and Punjab (in 2022) have transitioned back to the OPS, reflecting a broader critique of the NPS.
Thus, ahead of the upcoming round of Assembly elections in Jammu & Kashmir, Haryana, Maharashtra, and Jharkhand (the schedules for the latter two have not yet been announced), the Centre’s announcement of a novel pension scheme is a major political development.
Key Features of the Unified Pension Scheme (UPS)
The UPS introduces several features aimed at addressing the perceived shortcomings of the NPS:
1. Assured Pension: The UPS will provide retirees with a pension amounting to 50 percent of their average basic pay, calculated over the last 12 months before retirement, for a minimum of 25 years of service. For shorter service periods, the pension amount will decrease proportionately, down to a minimum of 10 years.
2. Assured Minimum Pension: Employees who retire after at least 10 years of service will receive a minimum pension of Rs 10,000 per month.
3. Assured Family Pension: In the event of a retiree’s death, the employee’s immediate family will receive 60 percent of the last drawn pension.
4. Inflation Indexation: Pensions under the UPS will be adjusted for inflation based on the All India Consumer Price Index for Industrial Workers, similar to the current practice for serving employees.
5. Lump Sum Payment at Superannuation: Retirees will receive a lump sum payment, in addition to gratuity, calculated as 1/10th of their monthly emolument (pay plus dearness allowance) for every six months of completed service.
Background on the NPS and its criticisms
The NPS, introduced on January 1, 2004, replaced the OPS as part of the Centre’s pension reforms. The OPS had been criticized for being unfunded, leading to increasing government pension liabilities. The NPS aimed to address this by establishing a contributory scheme where both employees and the government make contributions.
Under the OPS, pensions were fixed at 50 percent of the last drawn basic pay, with additional dearness allowances for cost-of-living adjustments. However, the OPS was deemed unsustainable due to its lack of funding and growing liabilities.
The NPS required employee contributions alongside a matching government contribution, initially set at 10 percent of basic pay and dearness allowance by the employee and 14 percent by the government (now increased to 18 percent). This system introduced variability in returns, which led to dissatisfaction among government employees who favored the assured returns of the OPS.
Committee Recommendations and Transition to UPS
In response to criticism of the NPS, Prime Minister Narendra Modi constituted a committee led by Cabinet Secretary TV Somanathan (then Finance Secretary) in 2023. This committee conducted extensive consultations, holding over 100 meetings with various organizations and states. The committee’s recommendations have led to the announcement of the UPS.
Implementation and impact
The UPS is set to be implemented from April 1, 2025, and will apply to all those who retired under the NPS from 2004 onwards. According to Somanathan, retirees under the NPS will have their arrears adjusted with the amounts they have already received. He stated, “I think in over 99 percent of cases it will be better to go into the UPS [rather than the NPS]… to the best of my knowledge, almost nobody will want to remain in the NPS, but if there is somebody, we are leaving options with them.” This indicates that while employees can choose to remain under the NPS, the UPS may offer better benefits.
Currently, the UPS is announced for Centre government employees, but states have the option to adopt it as well.
Difference between UPS and OPS
Somanathan noted that the expenditure for arrears under the UPS will be Rs 800 crore, with the first year’s implementation estimated to cost the exchequer roughly Rs 6,250 crore. Despite the significant expenditure, Somanathan argued that the UPS is a more fiscally prudent option. “One, it remains in the same architecture of a contributory funded scheme. That is the critical difference. The OPS is an unfunded non-contributory scheme. This (the UPS) is a funded contributory scheme,” he explained.
He further elaborated, “The only difference in the changes that are made today is to give an assurance and not leave things to the vagaries of market forces. The structure of the UPS has the best elements of both [OPS and NPS].”
(With inputs from The Indian Express)
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