Recently, the central government announced the Unified Pension Scheme (UPS) for its employees, which will be available solely to those currently enrolled in the New Pension Scheme (NPS), including retired employees. Under the UPS, employees with a minimum of 25 years of qualifying service are promised a pension equal to 50% of their average basic pay during the last 12 months before retirement. In contrast, the amount received through NPS depends on market returns.
How Pension Will Be Determined
The Central Cabinet has recently approved the UPS. Under this scheme, pensions will be determined on a proportional basis for a minimum service period of 10 years. It also guarantees a minimum pension of ₹10,000 per month upon retirement after at least 10 years of service. This scheme has been introduced to alleviate the concerns of government employees regarding NPS. The NPS was implemented on January 1, 2004, replacing the Old Pension Scheme (OPS), under which employees received 50% of their last basic salary as pension.
Contribution to Pension
Unlike the Old Pension Scheme, the UPS is a contributory scheme where employees must contribute 10% of their basic salary and dearness allowance. The employer (the central government) will contribute 18.5%. For NPS, the employer’s contribution is capped at 14%, while the employee’s contribution remains at 10%. However, the final payout under NPS is subject to the market returns of the fund, which is primarily invested in government securities.
Old Pension Scheme Overview
Under the OPS, which was in effect until December 2003, government employees did not have to make any contributions. However, they did contribute to the General Provident Fund (GPF), with the accumulated amount plus interest being returned upon retirement. OPS did not attract as many employees towards the NPS due to its older benefits system. As a result, some states governed by parties other than BJP decided to revert to OPS, which included benefits linked to the dearness allowance (DA).
States Reverting to OPS
Amid growing demands to reinstate OPS, the central government formed a committee in April 2023, led by former Finance Secretary TV Somanathan, to suggest improvements to the NPS framework. On August 24, the Central Cabinet approved the UPS, fulfilling the long-standing demands of government employees ahead of upcoming assembly elections in certain states.
Beneficiaries of UPS
The UPS will benefit 2.3 million eligible central government employees. However, those who opt for UPS will not be able to revert to the NPS. It is estimated that the UPS will impose an additional burden of ₹6,250 crores on the government treasury annually, although actual costs may vary with changes in employee numbers. Additionally, employees retiring before March 31, 2025, are owed ₹800 crores as dues under NPS. If these retirees choose UPS, they will receive the outstanding amount.
Potential Expansion of UPS
Information and Broadcasting Minister Ashwini Vaishnav announced on social media that the UPS would benefit 2.3 million central government employees. Furthermore, if states adopt the UPS framework, over 9 million government employees currently part of the NPS can benefit from it. The Maharashtra government became the first state to adopt UPS, ahead of the assembly elections scheduled for this year.
Views from Worker Unions
The Bharatiya Mazdoor Sangh (BMS), linked to the RSS, acknowledged that the government attempted to address the shortcomings of the NPS with the introduction of UPS but indicated that some issues remain compared to OPS. The BMS will determine its future course of action after a thorough examination of UPS following its notification. Conversely, the All India Trade Union Congress (AITUC) described UPS as merely an extension of the existing NPS and expressed concerns about inconsistencies that may arise after its implementation. They continue to advocate for the reinstatement of the non-contributory OPS.
Expert Opinions on UPS
Credit rating agency ICRA’s Chief Economist Aditi Nair noted that while the provision of guaranteed pensions will increase the government’s future spending commitments, it will reduce uncertainty for employees. Dorothy Thomas, a partner at Shardul Amarchand Mangaldas & Company, remarked that UPS reflects a thoughtful approach to long-term social security, addressing concerns regarding pension adequacy and stability in an evolving economic landscape.
