Introduction

The Union Cabinet recently approved a significant overhaul in pension provisions for Central government employees with the introduction of the Unified Pension Scheme (UPS), set to be implemented from April 1, 2025. The scheme is aimed at benefiting approximately 23 lakh Central government employees and offers an option for those under the National Pension System (NPS) to switch to the UPS. States may also opt to include their employees under this scheme, though they will need to secure funding independently.

Key Components of UPS

1. Pension Benefits
   • Monthly Pension: Employees will receive 50% of their average basic pay from the last 12 months of service as a monthly pension for life after a minimum of 25 years of service.
   • Proportional Benefits: For less than 25 years of service, the pension amount will be proportionately lower, with a minimum pension set at ₹10,000 for those with at least 10 years of service.
   • Family Pension: A family pension equivalent to 60% of the employee’s pension will be provided to dependents upon the employee’s death.
2. Inflation Protection
   • Pension incomes will be adjusted in line with the consumer price index for industrial workers, similar to the dearness relief given to serving employees.
3. Superannuation Payout
   • A lumpsum payout, in addition to gratuity, will be provided at retirement, amounting to 1/10th of the employee’s monthly emoluments for every six months of service.

Differences from the Current System

1. Old Pension Scheme (OPS)
   • Coverage: Employees who joined before January 1, 2004, are covered by OPS.
   • Pension Benefits: OPS provided an assured pension of 50% of the last drawn salary plus dearness allowance, a family pension of 60% of the last drawn pension, and a minimum pension of ₹9,000 plus dearness allowance. It also allowed commuting 40% of the pension as a lumpsum and offered additional hikes for pensioners over 80 years of age.
2. National Pension System (NPS)
   • Coverage: Employees who joined service on or after January 1, 2004, are covered by NPS.
   • Contribution-Based: NPS operates on a defined contribution basis where both employee and employer contribute to a pension fund, which is invested in market-linked securities. Upon retirement, employees must buy an annuity with 40% of their accumulated corpus.
   • Uncertainty: NPS does not guarantee a fixed pension amount, contrasting with OPS''s defined benefits.
3. Unified Pension Scheme (UPS)
   • Hybrid Model: UPS combines the defined benefits of OPS with the defined contribution aspects of NPS. Employee contributions are fixed at 10% of salary, while government contributions are higher at 18.5%.
   • Government Liability: The government will cover any shortfall between actual earnings on contributions and promised pension benefits. It remains unclear whether UPS will include future Pay Commissions or increased pensions for senior pensioners as OPS did.

Rationale for the Change

• Employee Discontent: The switch from OPS to NPS faced significant pushback from employees due to the loss of guaranteed pension benefits and discrepancies in benefits for different cohorts of employees.
• Political and Electoral Considerations: The decision to introduce UPS also responds to political pressures and electoral considerations, with opposition parties advocating for a return to OPS in several states.
• Fiscal Responsibility: The new scheme aims to balance employee expectations with fiscal prudence, as indicated by the review committee headed by former Finance Secretary T.V. Somanathan.

Reactions and Impact

• Employee Reactions: While employees have generally welcomed the UPS, there are concerns about the contributory nature of the scheme and the lack of a commutation option.
• State Reactions: States have expressed various degrees of interest in adopting UPS, though they will need to manage the financial implications independently.
• Economic Impact: The initial cost of implementing UPS is projected to be ₹7,050 crore, with future expenditures tied to inflation adjustments. Economists see UPS as a potential long-term fiscal challenge but acknowledge it as a move towards reducing pension uncertainty for employees.

Conclusion

The Unified Pension Scheme represents a major shift from the old pension system, aiming to merge the stability of OPS with the financial sustainability of NPS. The scheme reflects an attempt to address employee grievances while managing fiscal responsibilities, with its full impact yet to be evaluated as it comes into effect.