Unified Pension System Explained: How UPS, NPS and OPS Affect Your Pension | Personal Finance

Under this scheme, government employees will contribute 10% of their basic salary plus Dearness Allowance (DA), while the government will contribute 18.5%. In addition, there is a separate pool fund financed by an additional 8.5% contributed by the government. UPS guarantees you a pension equivalent to 50% of your average basic salary for the past 12 months.

Adhil Shetty, CEO of Bankbazaar.com, said: “The SAI could modernise India’s pension system, offering a more sustainable approach for both the government and employees. However, its effectiveness will largely depend on how well it is implemented.”

How much pension will you receive?

To understand how much pension he could receive, Krishna Mishra, CEO of FPSB India, helps us break down the calculation for Ashish, a 42-year-old government employee earning Rs 900,000 a year, with a basic salary of Rs 780,000. The amount he would receive under each plan varies:

Old pension system (OPS)

According to the PAHO, his pension is calculated as 50% of his last basic salary. For Ashish:

Basic Salary: Rs 7.8 lakh per annum

Basic monthly salary: Rs 780,000 ÷ 12 = Rs 65,000

Pension: 50% of Rs 65,000 = Rs 32,500 per month

So, according to the PAHO, Ashish would get a monthly pension of around Rs 32,500.

National Pension System (NPS)

NPS works differently as your pension depends on the accumulated capital. Here is how it works:

Employee Contribution: 10% of Basic Salary = Rs 78,000 per annum

Employer Contribution: 10% of basic salary = Rs 78,000 per annum

Total annual contribution: Rs 156,000

Estimated return on investment: 8% per year

Corpus after 18 years: Using compound interest, the corpus at the time of retirement would be approximately Rs 6.9 crore.

From this corpus, assuming he uses 40% to purchase an annuity at a rate of 6%, Ashish would get:

Monthly pension: Rs 13,800

So, under the NPS, Ashish would get a monthly pension of around Rs 13,800.

Unified Pension System (SPU)

UPS aims to give you the best of both worlds by combining the features of OPS and NPS. Here’s what you can expect:

Pension: 50% of OPS benefit + Annuity from a smaller corpus similar to NPS

To Ashish:

OPS Share: 50% of Rs 32,500 = Rs 16,250

NPS-like annuity: Rs 13,800

Adding these:

Monthly pension: Rs 16,250 + Rs 13,800 = Rs 30,050

So, under the UPS, Ashish would get a monthly pension of around Rs 30,050.

Please note that the Department of Expenditure (DoE) of the Ministry of Finance is likely to issue an operational framework for the implementation of the UPS. This framework will outline procedures for various situations, such as for those who retired under the NPS and made partial withdrawals from their annuity. Therefore, actual calculations may differ.

How does UPS compare to NPS and OPS?

Now that you understand how much you could receive under each plan, let’s see how UPS compares to the other options.

Old pension system (OPS)

The OPS was a defined benefit plan exclusively for government employees. It promised a guaranteed pension based on 50% of their last basic salary, with no contributions required from the employee. This pension was fully funded by the government and adjusted for inflation through the Dearness of Living Allowance.

Mishra said, “OPS is a defined benefit pension scheme, which normally calculates pension based on the last salary drawn and years of service.”

National Pension System (NPS)

The NPS, launched in 2004, offers a defined contribution plan available to both government and private sector employees. In this plan, your pension amount depends on market returns and you contribute 10% of your salary, to which the government adds a 14% contribution. On retirement, you can withdraw up to 60% of the capital tax-free.

“The main challenge for NPS is the uncertainty over the final pension amount due to market volatility,” Mishra said.

Unified Pension System (SPU)

UPS seeks to harmonize the benefits of OPS and NPS into a single, more balanced scheme. It offers a hybrid model where you get a fixed benefit similar to OPS, along with a contribution-based component similar to NPS.

Former Finance Secretary TV Somanathan commented, “It is fiscally prudent in the sense that we will have to absorb it every year in the Union Budget within our budgeted fiscal deficit.” He added that the UPS is fully funded and contributory, ensuring that no burden is passed on to future governments.

What are the challenges of OPS and NPS?

According to experts:

Old pension system (OPS)

Fiscal burden: Siddharth Maurya, Founder and CEO of Vibhavangal Anukulakara, said that the PAHO imposed a huge fiscal burden on the government due to rising liabilities, making it unsustainable in the long run, especially given the changing demographics.

National Pension System (NPS)

1. Market volatilityMaurya pointed to uncertainty over the final pension amount due to market volatility, which can make it difficult for people to predict their post-retirement income.

2. ComplexityMishra also noted that NPS is complex, particularly when it comes to understanding the various investment options, which can be confusing for employees.

3. No returns guaranteedUnlike OPS, NPS does not offer guaranteed returns, which can be a concern for employees looking for a stable income after retirement.

Benefits and challenges of the Unified Pension System (SUP)?

Here’s what this means for both the government and you as an individual, according to Krishna Mishra of FPSB India:

Benefits for the government

1. Long-term fiscal sustainability: The UPS is designed to be more fiscally sustainable over the long term compared to the OPS, reducing the government’s long-term liabilities.

2. Reduction of long-term liabilitiesBy limiting the financial burden on the government, the UPS aims to ensure a balanced approach to pension funding.

3. Simplified and transparent pension structureThe SPU simplifies pension management by unifying them under a single system, which also guarantees equitable retirement benefits across different sectors.

4. A step towards pension reformMishra says the introduction of UPS is seen as a progressive step towards reforming India’s pension system.

Challenges for the government

1. Political oppositionThe implementation of the UPS may face political challenges, particularly from those who oppose changes to existing pension schemes.

2. Logistical challengesUPS implementation will face significant logistical challenges due to the large number of people and organizations it covers.

Benefits for individuals

1. Greater pension securityCompared to NPS, UPS can offer more predictable returns and greater security for retirees. The plan combines the market-based returns of NPS with the fixed benefits of OPS, including features such as an assured pension, inflation indexation, family pension and a minimum pension.

2. Improved performance: UPS could offer better returns by leveraging the growth potential of market investments, similar to NPS, while maintaining a base level of guaranteed income from OPS elements.

3. Hybrid model with double benefit:UPS offers a hybrid model that combines the stability of OPS fixed benefits with the flexibility and auto-contribution features of NPS. This gives you a guaranteed pension and the possibility of higher returns from market-linked investments.

Challenges for individuals

1. Market risk:The UPS incorporates market-based returns, meaning your pension could still be affected by market volatility, similarly to the NPS.

2. Lowest guaranteed pension: While UPS offers more security than NPS, it may not match all the guaranteed benefits of OPS, particularly if market conditions are unfavorable.

3. Limited flexibility: The hybrid nature of the SPU may limit flexibility compared to the SOP. Adapting to this new system may require a better understanding of both defined benefit and contribution-based pensions.