Approved by the Union Cabinet on August 24, 2024, the UPS emerges as a solution to balance the need for better employee benefits with fiscal sustainability. The UPS combines the assured benefits of the OPS with the contributory nature of the NPS, offering a more stable and predictable retirement plan for government employees. Here’s how the UPS is different from its predecessors.
The old pension system (OPS): the era of defined benefits
Prior to 2004, public employees were covered by the OPS, a fully government-funded defined benefit system. Retirees received 50% of their final salary as a life pension, without making any contributions during their service.
The OPS also offered a dearness allowance, which adjusted the pension for inflation, and a family pension for dependents. While the OPS was popular with employees because of its predictability and security, it placed a significant financial burden on the government as it did not require employee contributions, making it a better plan for employees but also a greater liability for the government.
National Pension System (NPS): Market-linked contributions
In 2004, the government introduced the NPS for employees who joined after 1 January of that year. The NPS marked a shift from a defined benefit system to a defined contribution system. Both the employee and the government contributed to the pension fund – 10% and 14% of the employee’s salary, respectively.
These contributions were invested in market-linked securities, such as shares, meaning that the final pension amount depended on the performance of these investments.
While the NPS offered flexibility in investment options and aimed to reduce the financial burden on the government, it introduced market risks, leading to uncertainty about the pension outcome. The NPS also lacked the guaranteed benefits of the OPS, making it less attractive to employees.
Many public employees across the country threatened to strike and protested against this plan.
In March 2023, the government set up a committee chaired by the then Finance Secretary TV Somanathan to explore options to enhance NPS benefits without reverting to the old pension system (OPS), which was non-contributory and fiscally unsustainable. This move was taken in response to several states moving away from NPS and reverting to OPS.
Unified Pension System (SPU): in search of balance
The newly approved UPS scheme aims to strike a balance between the government’s fiscal policy and employee benefits. The new scheme offers a defined benefit pension similar to the OPS, but retaining the contributory nature of the NPS.
Under the UPS, public employees will receive a guaranteed pension equal to 50% of their average basic salary earned during the last 12 months prior to retirement. This pension is available to employees with at least 25 years of service, with proportional adjustments for those with a minimum of 10 years of service.
The UPS also introduces several additional benefits over the NPS. These include a guaranteed minimum pension of ₹10,000 per month for employees with at least 10 years of service. However, under the OPS, while there was no specific minimum pension amount mandated, retirees were generally given 50% of their last earned salary as pension.
The UPS also offers family pension benefits equal to 60% of the employee’s pension in the event of death. Under the OPS, a family pension was also provided, which was usually set at a percentage of the employee’s pension. The specific rate for family pensions under the OPS varied, but was generally less than 60%.
The new UPS scheme also has inflation indexation based on the All India Consumer Price Index for Industrial Workers (AICPI-IW).
While the PAHO included some form of dearness relief, which was intended to adjust pensions for inflation, the mechanism and frequency of adjustments were less standardized compared to the AICPI-IW approach under the UPS.
In addition, employees will receive a lump sum payment upon retirement, equivalent to 1/10 of their monthly emoluments (including salary and dearness allowance) for every six months of service completed.
Unlike the OPS, the UPS requires contributions from both employees (10% of salary) and the government (18.5% of salary). This contribution was 14% from the government in the National Pension System and 10% from employees.
However, in the new scheme, the government contribution can be adjusted periodically based on actuarial assessments to ensure that the scheme remains fiscally sustainable. While the NPS will continue to be an option, the UPS is expected to be more attractive to most government employees due to its guaranteed benefits and lower exposure to market risks.
The Unified Pension System represents a policy shift that aims to balance fiscal responsibility with the need for a secure and predictable pension system for government employees.
Disclaimer:
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.