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the story So Far: Fulfilling a long-standing demand of government unions, the Centre on Saturday (August 24, 2024) introduced a bill. New ‘Unified Pension Scheme’ (UPS) Government employees were assured half of their last salary as a lifetime monthly benefit.
The UPS, which has been approved by the Union Cabinet, has several other features benefiting pensioners, such as periodic dearness relief increase in line with inflation and minimum pension of ₹10,000 per month for pensioners with at least 10 years of government service.
The announcement has evoked mixed reactions from trade unions across political parties. The Rashtriya Swayamsevak Sangh (RSS)-affiliated Bharatiya Mazdoor Sangh (BMS) has welcomed the move but sought more clarity on some of the features of the UPS. However, trade unions like Hindu Mazdoor Sangh, CITU and AITUC, which are affiliated to the Opposition, claimed that the UPS is aimed at defrauding employees.
Editorial | The middle path: On a unified pension scheme
Most parties, including the Congress, have said that the implementation of the UPS would be a reversion to the Old Pension Scheme (OPS), which was originally implemented during colonial rule. The move is also a surprise retreat by the NDA government as it was the original NDA – the Atal Bihari Vajpayee government – that scrapped the OPS to establish the New Pension Scheme (NPS).
Here is a comparative look at the three schemes.
Old Pension Scheme(OPS)
Under the Pension Act, 1871, the British established a system of paying pensions to government employees, giving the central and state governments the power to make rules for the distribution of money. Based on the ‘defined benefit’ concept, this pension scheme assured the retired person 50% of his last drawn basic salary as his pension. The scheme also introduced a ‘dearness allowance’ (DA), which was calculated as a percentage of the pensioner’s salary to mitigate the impact of rising cost of living and was increased by the government whenever necessary.
The scheme also gave employees the option to deposit a part of their income in the General Provident Fund, which would be paid with interest on retirement. The gratuity limit was Rs 20 lakh and the pension was given to the family after retirement.
However, this pension was ‘unfunded’, i.e. there was no fund (like the Contingency Fund of India) from which the pension was drawn. Hence, employees did not have to make any deductions from their salaries to contribute to the pension fund. The government made budgetary allocations to pay the pension under the ‘pay-as-you-go’ system, i.e. funds were drawn from government income such as taxes collected from citizens.
By December 2023, Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh – all governed by opposition parties – have switched to OPS for their state government employees. However, Punjab still continues to pay employee and government contributions to the New Pension Scheme.
New Pension Scheme(NPS)
Burdened with ever-increasing pension liabilities, the Centre scrapped OPS on January 14, 2004 and replaced it with the New Pension Scheme (NPS). Based on the ‘defined contribution’ concept, NPS had a two-tier system. Employees who joined service after the scheme came into force did not have the option to join OPS and were allotted a unique Permanent Pension Account Number (PPAN) upon joining.
Under the first tier, a government employee had to make a mandatory contribution of 10% of his basic pay and DA and the government would make an equal contribution to the pension account. Under the second, optional tier, employees could make their own contributions under a separate account, withdrawal of which was at the discretion of the employee.
At the time of retirement (at the age of 60 years) a government employee is mandatorily required to invest 40% of the pension received in buying an annuity, which will provide life-long pension to the employees and their dependents. If an employee retires early, the mandatory purchase of annuity increases to 80% of the pension amount. This annuity ensures a regular income-stream for retirees.
NPS established the independent Pension Fund Regulatory and Development Authority (PFRDA) to regulate and develop the pension market. Fund managers such as SBI Pension Fund, UTI Retirement Solution and LIC Pension Fund were in charge of investing the funds in a number of financial instruments such as government securities, debt instruments, equities and asset-backed trusts.
All central government employees, except members of the armed forces, who joined service on or after January 1, 2004, were covered under the NPS. Employees who joined before that date had the option to continue with the OPS. Under the OPS, employees could nominate up to three individuals and allocate part of the pension amount they receive.
Unlike OPS, NPS has employee and employer contributions to a pension fund that creates the individual’s wealth payable at the time of retirement through annuity and lump-sum withdrawals. Voluntary investments in the National Pension Scheme by any individual who is already covered under mandatory schemes like the Employees’ Provident Fund Organisation (EPFO) are tax-deductible with a maximum limit of ₹1.5 lakh. Also, 60% of the lump-sum amount that can be withdrawn on retirement is tax-free. All states except Tamil Nadu and West Bengal have implemented NPS.
Unified Pension Scheme(UPS)
The recently introduced UPS is similar to OPS in most material details. Retirees are assured of 50% of the basic pay drawn in the last year (after at least 25 years of service). For less service (up to ten years), the percentage reduces proportionately, but the minimum amount is fixed at ₹10,000. 60% of the pension drawn by the employee before his death will be given as family pension. All the above pensions are assured with inflation index. The scheme also assures 10% of the monthly pension amount (pay plus DA) on the date of retirement for every completed six months of service.
While most of the features of UPS are similar to OPS, the new scheme is not funded. Like NPS, employees will contribute 10% of their salary and the government will contribute 18.5% of the salary. The threshold level for employees will remain constant at 10%, but the government’s contribution will be adjusted higher or lower based on periodic actuarial assessments. UPS will have retrospective effect, that is, those who joined after January 1, 2004 and retired under NPS will now be eligible for UPS.
What is the response to UPS?
Before the launch of the UPS, Prime Minister Narendra Modi met the employee side of the Joint Consultative Mechanism (JCM), which acts as a bridge between central government employees and the Centre. Though the meeting was cordial, the JCM is divided in opinion after the announcement.
JCM Secretary Shiv Gopal Mishra told Hindu The UPS is a welcome move, but All India Defence Employees Federation general secretary C. Srikumar said employees will not accept any pension provision that makes contributions compulsory.
Similarly, the BMS has sought clarification on the proportion of lump sum payment on exit, revision of pension by future pay commissions, tax benefits and increase in pension on completion of 80, 85, 90, 95 and 100 years. On the other hand, the Left unions have accused the Centre of investing pension funds worth ₹10,53,850 crore of a total of 99,77,165 employees under the NPS in the stock market.
The opposition too has given mixed reviews to the new scheme. Mr Kharge has credited the opposition for the Centre’s ‘U-turn’, while the All India Professional Congress has welcomed the scheme, claiming that “UPS = NPS + minimum guarantee. This is prudent and welcome.” On the other hand, Pawan Khera of the Congress has claimed that UPS “seems to be an attack on Dalits, Adivasis and backward classes”. Opposition-ruled states like Telangana, Tamil Nadu, Rajasthan are also cautious and are ‘studying’ the scheme before deciding on its implementation.
Under the UPS, 23 lakh central employees will get the benefit of increased pension and if state governments sign on to it (this is optional), the number of beneficiaries will increase to 90 lakh. Union Minister Ashwini Vaishnaw has said that the Centre’s increase in pension contribution will put an additional burden of ₹6,250 crore per year on the exchequer. The decision is aimed at boosting goodwill for the upcoming state elections in Delhi, Bihar, Jharkhand, Haryana, Maharashtra and Jammu and Kashmir, where the BJP is facing a strong opposition.
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