Key Developments: Last weekend, the Union Cabinet made a significant announcement regarding the future of pension security for Central government employees, paving the way for the implementation of a new Unified Pension Scheme (UPS) scheduled to launch on April 1, 2025. Approximately 2.3 million Central government employees are anticipated to benefit from this new scheme. Employees currently enrolled in the existing pension structure known as the National Pension System (NPS), will have a one-time opportunity to transition to the UPS. Additionally, state governments will have the option to include their employees in the UPS framework, with the responsibility of determining the funding coming from their own resources.
Benefits of the Unified Pension Scheme (UPS)
The UPS offers five primary benefits. Firstly, government employees will receive a monthly pension equivalent to half of their average basic pay drawn during the final 12 months of service, guaranteed for life, contingent upon a minimum service duration of 25 years. For those serving fewer years, the pension will be proportionately reduced, provided they have served at least 10 years. The minimum pension amount for superannuated employees is set at ₹10,000 for those with a decade of service. Additionally, the UPS includes a family pension, which will provide 60% of the deceased employee’s pension to support dependents. To counteract inflation, pension incomes will be adjusted in line with consumer price trends relevant to industrial workers, similar to dearness relief allowances for active government employees. Lastly, upon retirement, employees will receive a lump sum superannuation payout alongside gratuity benefits, calculated as 1/10th of monthly emoluments for every six months of completed service.
Differences Between the UPS and Existing Pension Systems
Currently, government employees who began service prior to January 1, 2004, are covered by the Old Pension Scheme (OPS). This scheme guarantees a pension at 50% of the last drawn salary, along with periodic dearness allowance hikes, a family pension of 60%, and a minimum pension of ₹9,000 plus additional allowances. Employees are also permitted to commute a portion of their pension into a lump sum at retirement. Notably, additional pension benefits are provided to pensioners over 80 years of age.
The NPS, introduced following concerns about the sustainability of pension liabilities, replaced the OPS for employees joining in or after 2004. Under the NPS, employee and employer contributions are pooled into market-linked investments, with a mandated purchase of an annuity upon retirement. Although the Centre increased its portion of NPS contributions to 14% in 2019, the system lacks the assured income structure characteristic of the OPS. Employees who retire under the NPS are now permitted to convert to the UPS.
The UPS aims to merge the defined benefits of the OPS with the defined contributions of the NPS. While employee contributions will remain at 10% of salary, the government will contribute 18.5% to the pension pool, absorbing any shortfall between actual investment returns and promised pensions under the UPS. It remains uncertain if future Pay Commission recommendations will be included in the UPS framework or if enhanced benefits will be available for employees over 80, similar to the OPS.
Government’s Rationale for Change
The NPS regime has faced significant backlash from government employees dissatisfied with the perceived decline in security regarding their pension incomes. It became a point of contention in recent electoral campaigns, with some opposition parties promising a reversion to the OPS. The current government has resisted such reversals, labeling them as financially irresponsible. However, in March 2023, the Finance Minister announced a review committee to reassess the NPS, aimed at reconciling employee expectations with fiscal responsibility. Although the committee’s findings remain unpublished, they have played a role in shaping the UPS offer.
Reactions from Employees and Financial Implications
The announcement of the UPS has generally been met with approval from Central government employees, who see it as a recognition of the shortcomings of the NPS. However, concerns persist regarding the contributory aspect of the UPS and the absence of a commutation option. Economists and stakeholders are awaiting further details on the UPS’s financial structure. The implementation of UPS is projected to incur an additional ₹7,050 crore in costs this year alone, and any future dearness allowance increases will necessitate further funds. Experts suggest that while the immediate fiscal impact will be an additional 4.5% towards the UPS, growth in revenue could offset future expenses.
