The Union Cabinet's recent approval of the Unified Pension Scheme (UPS), set to launch on April 1, 2025, comes ahead of crucial Assembly elections in states like Jammu & Kashmir, Haryana, Maharashtra, and Jharkhand. Maharashtra has already adopted the scheme, making it the first state to do so. Several states, including Himachal Pradesh, Chhattisgarh, and Punjab, have reverted to the Old Pension Scheme (OPS).
Finance secretary TV Somanathan, who also chaired the pension panel, estimated that the new Unified Pension Scheme will cost the government ₹6,250 crore, with an additional ₹800 crore required to cover arrears for retirees.
According to the latest data from the Ministry of Statistics and Programme Implementation (MoSPI), the National Pension Scheme (NPS) saw a decrease in new subscribers in June, with only 64,799 additions compared to 79,080 in May. Additionally, the existing subscriber base declined 8% from May to June, falling to 7,431,852.
Here's a comparison of the UPS with the existing NPS and the OPS.
Old Pension Scheme (OPS)
The scheme provided government employees with a guaranteed pension equivalent to 50% of their last drawn basic salary, which increased with periodic hikes in Dearness Allowance (DA) to account for inflation. Upon retirement, employees were also entitled to a gratuity of up to ₹20 lakh. In the event of the retiree's death, the family continued to receive pension benefits under a family pension provision. Notably, OPS required no employee contributions, as the government bore the entire cost of funding the pension.
However, the OPS posed significant fiscal challenges for the government. As a defined benefit plan solely for government employees, it promised guaranteed pensions based on the last drawn salary and years of service. This led to a growing financial burden for the government, especially as demographic changes led to a rise in retiree numbers.
National Pension Scheme (NPS)
Introduced in 2004, NPS replaced OPS to address the fiscal burden. Unlike in the OPS, employees contribute 10% of their salary, and the government matches this with a 14% contribution. The final pension under NPS is market-linked, offering no guaranteed returns, making the pension amount variable based on market performance.
NPS covers all government employees (except the armed forces) who joined after January 1, 2004, and is also available to private sector employees. At retirement, individuals can withdraw up to 60% of the accumulated corpus tax-free, with the remainder invested in annuity plans to provide a pension. While NPS offers the potential for higher returns through market investments, it carries the risk of market volatility, which introduces uncertainty in predicting post-retirement income. Moreover, its complexity, particularly in understanding the range of investment options and schemes managed by nine pension fund managers, can be confusing for employees. This lack of guaranteed returns and the need for employee contributions have driven opposition to NPS, especially among those accustomed to the stability of OPS.
Unified Pension Scheme (UPS)
Under the UPS, retirees are guaranteed a fixed pension, addressing one of the major criticisms of NPS.
Here are the key features of the scheme:
Assured Pension - Employees will receive 50% of their average basic pay from the last 12 months before retirement, provided they have a minimum of 25 years of service. For shorter service periods, the pension is adjusted proportionally, with a minimum qualifying period of 10 years.
Assured Minimum Pension - Upon retirement after at least 10 years of service, the UPS ensures a minimum pension of ₹10,000 per month.
Assured Family Pension - In the event of the employee's death, their family is entitled to 60% of the last drawn pension.
Inflation Indexation - The pension amounts, including family and minimum pensions, will be adjusted for inflation through Dearness Relief, linked to the All India Consumer Price Index for Industrial Workers (AICPI-IW).
Lump Sum Payment - At retirement, employees will receive a lump sum equivalent to 1/10th of their monthly salaries (including DA) for every six months of completed service, in addition to the gratuity. This payment will not reduce the assured pension.
In terms of contributions, employees will contribute 10% of their salary, while the government will contribute 18.5%, with an additional 8.5% going into a separate pooled corpus.
Combining the stability of OPS with the flexibility of NPS, the UPS enhances pension security with features, like inflation indexation and family pensions while promoting long-term fiscal sustainability for the government by capping liabilities. However, challenges include potential political resistance, implementation hurdles, and market volatility that may impact returns.
