Unified Pension Scheme (UPS)

Why in News?

The Union Cabinet has approved the Unified Pension Scheme (UPS), which aims to provide a guaranteed pension for government employees after retirement. The scheme will take effect on April 1, 2025, with central government employees transitioning from the current National Pension System (NPS) to the UPS. State governments will also have the option to adopt the UPS.

Provisions of the Unified Pension Scheme

• Guaranteed Pension: Employees will receive a pension amounting to 50% of their average basic pay over the last 12 months before retirement, provided they have a minimum qualifying service of 25 years. This pension amount will be reduced proportionately for shorter service periods, with a minimum of 10 years required.
• Assured Minimum Pension: For those retiring after at least 10 years of service, the scheme ensures a minimum pension of Rs 10,000 per month.
• Family Pension: Upon the retiree’s death, the immediate family will receive 60% of the pension amount that was last drawn by the retiree.
• Inflation Adjustment: Dearness relief will be available for all three types of pensions (regular, minimum, and family pensions), and adjustments will be made based on the All India Consumer Price Index for Industrial Workers.
• Lump Sum Payment at Retirement: In addition to gratuity, employees will receive a lump sum payment equivalent to 1/10th of their monthly emoluments (including pay and Dearness Allowance) as of the retirement date for every six months of completed service. This payment does not affect the assured pension amount.
• Gratuity: This is an additional payment made by employers to their employees as a reward for their service.
• Choice for Employees: Employees can choose to remain under the NPS, but this decision is final and cannot be changed once made.

Key Differences Between UPS, Old Pension Scheme (OPS), and National Pension Scheme (NPS)

• Pension Calculation: Under OPS, the pension was 50% of the last base salary plus Dearness Allowance (DA). Under UPS, it is calculated as 50% of the average of the basic salary plus DA from the last year before retirement, potentially resulting in a slightly lower pension if an employee is promoted shortly before retiring.
• Employee Contribution: OPS required no employee contributions. UPS requires a 10% contribution from the employee’s basic pay and DA, with the government contributing 18.5%. In contrast, the NPS required a 10% employee contribution and a 14% government contribution.
• Tax Benefits: Central government employees can claim tax benefits under the Income Tax Act, 1961, for the government’s contribution to the NPS. There were no such benefits for OPS since there were no employee contributions. It is unclear whether contributions under UPS will be eligible for tax benefits.
• Higher Minimum Pension in UPS: UPS offers a higher minimum pension of Rs 10,000 per month after a minimum of 10 years of service, compared to Rs 9,000 under the current schemes.
• Lump Sum Payments: OPS allowed for the commutation of up to 40% of the pension into a lump sum payment, which reduced the monthly pension amount. UPS, however, provides a lump sum payment based on one-tenth of the monthly salary plus DA for every six months of service, without reducing the pension amount.

Overview of NPS

• Introduction: The National Pension System (NPS) is a market-linked contribution scheme introduced by the Central Government to provide individuals with a source of income in the form of a pension to meet their retirement needs. NPS replaced OPS on January 1, 2004, as part of pension reforms.
• Regulation: The Pension Fund Regulatory and Development Authority (PFRDA) regulates NPS under the PFRDA Act, 2013.
• Need for NPS: The OPS was unsustainable because it was unfunded and lacked a dedicated corpus for pensions, leading to escalating pension liabilities. For instance, the Centre’s pension liabilities surged from Rs 3,272 crore in 1990-91 to Rs 1,90,886 crore in 2020-21.
• How NPS Works: Unlike OPS, NPS does not guarantee a pension amount; it is a contributory scheme funded by both the employee and the government, with a defined contribution of 10% of basic pay and DA by the employee and 14% by the government. Employees can choose from various schemes and pension fund managers, including private companies, to invest their contributions.
• Opposition to NPS: There has been opposition to NPS because government employees under this scheme receive lower guaranteed returns and must contribute to their pensions, unlike in OPS, where there were no employee contributions and higher guaranteed returns. Due to ongoing demands for a return to OPS, the government formed a committee in 2023 led by T V Somanathan, whose recommendations have led to the introduction of the new Unified Pension Scheme (UPS).

Fiscal Implications of UPS

• Debt-to-GDP Ratio: The UPS will significantly impact the fiscal budget, especially for a government with a high debt and debt-to-GDP ratio. The cost of the scheme could further strain government finances.
• Fiscal Burden: According to a Reserve Bank of India study from September 2023, if all states were to switch to OPS, the fiscal burden could be up to 4.5 times that of the NPS, potentially reaching 0.9% of GDP annually by 2060. Concerns have been raised about how the UPS will affect Union finances, given its similarities to OPS.

Conclusion

The Unified Pension Scheme (UPS) aims to balance the fiscal cost with employee aspirations. It addresses the uncertainties associated with the National Pension Scheme (NPS) and the high fiscal burden of reverting to the Old Pension Scheme (OPS). By combining elements of both OPS (defined benefits) and NPS (contributory scheme), UPS provides a defined return on the pension pool, reducing market risks. With assured returns and inflation protection, UPS is expected to increase the overall pension fund, mitigating some risks associated with the debt burden.