In a significant policy shift, the Union Cabinet has approved the Unified Pension Scheme (UPS), set to take effect from April 1, 2025. This new scheme aims to provide a balanced approach to government employees' retirement benefits, addressing concerns raised by the National Pension System (NPS) while avoiding the fiscal pitfalls of the Old Pension Scheme (OPS).
Key Provisions of the Unified Pension Scheme
The Unified Pension Scheme promises several key benefits designed to provide security and predictability for government employees post-retirement:
- Assured Pension: Employees will receive a pension amounting to 50% of their average basic pay over the last 12 months before retirement, provided they have served for a minimum of 25 years. For shorter service periods, the pension amount is proportionately reduced, with a minimum service requirement of 10 years.
- Assured Minimum Pension: For those retiring after at least 10 years of service, the UPS guarantees a minimum pension of Rs 10,000 per month.
- Family Pension: In the unfortunate event of a retiree’s death, their immediate family will receive 60% of the last drawn pension.
- Inflation Indexation: Pensions under UPS will be adjusted for inflation based on the All India Consumer Price Index for Industrial Workers, ensuring that retirees’ purchasing power is maintained.
- Lump Sum Payment at Retirement: Employees will receive a lump sum payment equivalent to one-tenth of their monthly emoluments (including pay and DA) for every six months of service, in addition to gratuity. This payment does not affect the assured pension amount.
- Employee Choice: While UPS will become the default pension scheme, employees retain the option to stay with NPS. However, this choice is irrevocable once made.
Comparing UPS with OPS and NPS
The UPS offers a middle path between the traditional OPS and the more recent NPS, addressing concerns of both systems.
- Pension Calculation: Unlike OPS, where the pension was fixed at 50% of the last basic pay plus DA, UPS bases the pension on the average of the last year’s basic pay plus DA. This method slightly reduces the pension amount for those who receive promotions shortly before retirement.
- Employee Contribution: Unlike OPS, which required no employee contribution, UPS mandates a 10% contribution of the basic pay and DA, with an 18.5% contribution from the government. This is an increase from NPS, where the government’s contribution was 14%.
- Tax Benefits: NPS participants enjoy tax benefits under the Income Tax Act, 1961, for the government’s contribution. However, it remains unclear if similar benefits will apply under UPS.
- Minimum Pension: UPS raises the minimum pension to Rs 10,000 per month, slightly higher than the NPS’s minimum of Rs 9,000.
- Lump Sum Payments: Unlike OPS, which allowed commutation of up to 40% of the pension, UPS provides a lump sum at retirement without affecting the monthly pension.
Fiscal Implications of the Unified Pension Scheme
The introduction of UPS is likely to have significant fiscal implications. The Reserve Bank of India’s study from September 2023 indicated that if all states reverted to OPS, the fiscal burden could increase dramatically, reaching 0.9% of GDP annually by 2060. The UPS, which resembles OPS in some respects, could strain government finances, particularly given the already high debt-to-GDP ratio.
Conclusion
The Unified Pension Scheme seeks to strike a balance between the fiscal discipline required by the government and the security that employees expect in their retirement years. By blending features of both OPS and NPS, UPS offers a defined benefit with reduced market risk, addressing the unpredictability associated with NPS while avoiding the unsustainable fiscal burden of OPS. With assured returns and inflation protection, the UPS is poised to be a more sustainable option, ensuring that the pension system remains robust in the face of economic challenges.
