What is the new Unified Pension scheme and how is it different from NPS?

The Unified Pension Scheme aims to balance fiscal policy with employee benefits and combines a defined benefit pension similar to the Old Pension Scheme with the contributory nature of the NPS

In a key decision, 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. 

Union Minister Ashwini Vaishnaw announced that the newly approved UPS would provide a 50 per cent assured pension as its first pillar, and an assured family pension as its second. 

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.

 

Vaishnaw also mentioned that 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.

Earlier on Sunday (August 25), Business Standard reported that 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.

Prime Minister Modi praised the UPS, emphasizing that it will provide dignity and financial security for government employees. In a post on ‘X’, he stated, “We are proud of the hard work of all government employees who contribute significantly to national progress. The Unified Pension Scheme ensures dignity and financial security for government employees, aligning with our commitment to their well-being and a secure future.”

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.

Will UPS be more fiscally prudent for the govt coffers?

The Indian Express quoted Finance Secretary TV Somanathan as saying that the arrears would cost the exchequer Rs 800 crore in the first year of implementation, with the overall expenditure amounting to roughly Rs 6,250 crore. 

“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 (UPS) is a funded contributory scheme,” he said.