Unified Pension Scheme (UPS)

The Union Cabinet has approved the Unified Pension Scheme (UPS), which will provide assured pension to government employees after retirement.
The scheme will be effective from April 1, 2025, when central government employees will migrate to UPS from the existing National Pension System (NPS).
State governments will also have the option to adopt an integrated pension scheme.

Provisions of the Integrated Pension Scheme:

It will be 50% of the average basic pay of the employee in the last 12 months before retirement for a minimum qualifying service of 25 years.
This amount will be reduced proportionately for shorter service period up to a minimum of 10 years.

UPS provides an assured minimum pension of Rs 10,000 per month in case of retirement after a minimum of 10 years of service.

On the death of the retired person, his immediate family will be eligible to get 60% of the pension last received by the retired person.

Dearness relief will be available on all the above three types of pensions.
The index for industrial workers will be calculated because of All India Consumer Price Index.

In addition to the gratuity, the employees will receive a lump sum payment on retirement, equivalent to 1/10th of their monthly salary (Salary + DA) as on the date of retirement on completion of every six months of service.
This payment will not affect the amount of the guaranteed pension.
Gratuity is a sum of money given by an employer to its employees for providing their services.

Employees can still choose to remain under NPS. However, an employee can opt-out only once. An option cannot be changed once it has been selected.

Pension in OPS was fixed at 50% of the last basic pay plus dearness allowance (DA).
Pension in UPS is calculated as 50% of the average of basic pay and DA taken in the last year before retirement.
This adjustment means that if an employee gets a promotion shortly before retirement, he will get a slightly lower pension.

No employee contribution was required in OPS.
The employee’s contribution to UPS is 10% of the basic salary and DA and the government will also contribute 18.5%.
NPS requires a contribution of 10% from the basic salary of the central government employee and 14% from the government.

Central government employees are eligible for tax benefits for the government’s contribution to the NPS scheme.
They can deduct up to 14% from both old and new tax regimes under the Income Tax Act, 1961.
Since there was no contribution of employees in OPS, they could not avail tax benefit.
The government has not yet clarified whether there will be any tax benefit on employee and government contributions under UPS.

The minimum pension under the UPS scheme is Rs 10,000 per month at the time of retirement after a minimum of 10 years of service.
The current minimum amount is Rs 9,000 after a minimum service period of ten years.

OPS allowed one-time payment of up to 40% of the pension, thereby reducing the monthly pension amount.
UPS provides a lump sum payment on retirement, calculated as one-tenth of the monthly salary plus dearness allowance for every six months of service and has no effect on the pension amount.

NPS was a market linked contribution scheme launched by the Central Government to help individuals provide income in the form of pension to meet their retirement needs.
NPS replaced OPS on January 1, 2004, as part of the government’s commitment to modernize India’s pension regulations.
Pension Fund Regulatory and Development Authority (PFRDA) regulates and administers NPS under the PFRDA Act, 2013.

There was a fundamental problem with OPS i.e. it was not funded and there was no special fund for pension.
Over time, this led to the government’s pension liability rising to financially unsustainable levels.
Pension liabilities of the Centre increased from Rs 3,272 crore in 1990-91 to Rs 1,90,886 crore in 2020-21.

NPS was different from OPS in two fundamental ways.
First it abolished the system of assured pension.
Second, it will be financed by the employee himself and the government will contribute equally.
The defined contribution included 10% of basic pay and dearness allowance by the employee and 14% by the government.
Under NPS, individuals can choose from a variety of schemes and pension fund managers as well as private companies to invest their money in NPS.

Under NPS, government employees got less guaranteed returns and had to contribute to their pension, while in OPS, there was no contribution from employees and the guaranteed returns were higher.
Amid the ongoing demands for the re-implementation of the old pension scheme, the Central Government had constituted a committee under the chairmanship of T.V. Somanathan in the year 2023. Based on the recommendations of the committee, the new Unified Pension Scheme (UPS) has been launched.

The Unified Pension Scheme (UPS) will have a cascading fiscal impact on a government with high debt and high debt-GDP ratio.
The cost of this scheme may put more pressure on government finances.

A study by the Reserve Bank of India (September 2023) warns that if all states implement OPS, the fiscal burden could be up to 4.5 times that of the National Pension System (NPS), possibly reaching 0.9 per cent of GDP annually by 2060.
Concerns have also been raised about how UPS will impact federal finances, as it is broadly like OPS.

The goal of UPS is to balance the fiscal cost with the aspirations of the employees. It addresses the problem of uncertainty of National Pension Scheme (NPS) and the additional fiscal pressure resulting from the re-implementation of Old Pension Scheme (OPS). UPS incorporates elements of both Old Pension Scheme (defined benefit) and National Pension Scheme (contributory), provides a defined return / dividend on the pension pool and reduces market risk. With assured returns and inflation protection, UPS is expected to enhance the overall pension fund, thereby reducing some of the risks associated with the debt burden.