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The UPS benefit has five key components, the first of which is the assurance that government employees will receive half of the average basic salary drawn in the last 12 months of service before retirement as a monthly pension for life. | Photo Credit: Getty Images/iStockphoto
the story So Far: Last weekend, the Union Cabinet signed off on a major change in the approach to providing old age income security to central government employees, setting the stage for providing old age income security to central government employees. New Unified Pension Scheme(UPS) The scheme will be launched on April 1, 2025. The new scheme is expected to benefit around 23 lakh central government employees, while employees who are part of an ongoing pension scheme called the National Pension System (originally called the New Pension Scheme or NPS) will have a one-time option to switch to UPS. States have been given the option to bring their employees under the UPS framework, and will have to work on funding the scheme from their own resources.
What benefits are being given under UPS?
There are five major components of the UPS benefit, the first of which is the assurance that Government employees will get half of their average basic salary of the last 12 months Employees who remain in service before retirement will receive a monthly pension for life. This promise is subject to a minimum of 25 years of service. Benefits will be proportionately less for employees with a shorter service period, provided they have served at least 10 years in the government. The minimum pension amount on retirement has been fixed at ₹10,000 for employees with 10 years of service. UPS also offers family pension, equal to 60% of the government employee’s pension at the time of their death, to support their dependents. To provide a hedge against inflation, these pension incomes will be scaled in line with consumer price trends for industrial workers – similar to the dearness relief allowance given to government employees. Last but not the least, UPS also promises a lump sum retirement payment in addition to gratuity benefits at the time of retirement. This will be 1/10th of an employee’s monthly emoluments, which is pay + dearness allowance on the date of retirement for every full six months of service.
How is it different from the current pension system?
Currently, government employees who joined service before January 1, 2004 are covered under the Old Pension Scheme (OPS), which was replaced by NPS for employees who joined service in 2004 or after.
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OPS offered employees an assured pension at 50% of the last drawn pay, plus hike in dearness allowance, assured family pension at 60% of the last drawn pension and a minimum pension of Rs 9,000 with dearness allowance. At the time of retirement, employees could commute 40% of the pension and receive it as a lump sum. In addition, pensioners who crossed the age of 80 years or family pensioners are given an additional 20% pension, which rises to 30% at the age of 85, 40% at the age of 90 and 50% at the age of 95. Pension income is also revised in line with pay updates as per the Pay Commission recommendations. The final pay upgrade for government employees based on the 7th Pay Commission recommendations began in 2016 and hence the OPS liabilities were “unfunded”, with no contributions made by either employees or employers, as is the case with non-government formal sector employees whose retirement savings are governed under the Employees’ Provident Fund (EPF) Act.
The NPS, launched through an executive order by the Atal Bihari Vajpayee government after years of debate over the unviability of civil servants’ pension bills, scrapped the defined benefit system of the OPS and switched to a ‘defined contribution’ pension regime. 10% of the employees’ salary was sent to the pension account with matching contributions from the employer (Centre, or State because almost all of them switched to NPS after 2004). These funds were pooled by pension fund managers in market-linked securities with an option to park some of the funds in the equity markets. At the time of retirement, employees had to buy an annuity (an insurance instrument that provides monthly income) with 40% of the funds accumulated in their NPS account. NPS members, including those who have already retired, can now join the UPS.
UPS combines the defined benefit model of OPS with the defined contribution NPS mechanism through its promised pension levels and other concessions. While employees’ contributions will be limited to 10% of salary as is the case with NPS, the government will contribute a higher 18.5% of salary to the pooled pension accounts. The Centre will also have to bear any difference between final income on these contributions and its assured pension promises under UPS. It is not clear at this point whether UPS will take into account the recommendations of future pay commissions or offer higher pensions for those above 80 years of age, as OPS did.
Why did the government opt for change?
The NPS system faced strong criticism from government employees both before and after its introduction, as they had no assurances about their potential pension income and the situation of post-2004 employees was very different from that of their predecessors. While this hue and cry continued even during the UPA years, the voices against it grew in recent years, especially when some of the early NPS joiners began retiring with poor pension benefits even after fewer years of service. This disquiet eventually became an electoral issue, with opposition parties like the Congress promising a rollback of OPS for state employees covered under NPS before some assembly elections and implementing it after gaining power in some. During the second term of the Narendra Modi government, the Centre opposed the rollback of the reform by the states, calling it a fiscally irresponsible concession.
However, in March 2023, Finance Minister Nirmala Sitharaman announced a committee to review the NPS for government employees, which would strike a “balance between their aspirations and fiscal prudence”. This panel, headed by former finance secretary TV Somanathan (now serving as Cabinet Secretary), held extensive consultations with employees and other stakeholders, and though its report has not yet been made public, the switch to UPS has been informed by its deliberations. If there was any doubt that the UPS’ bouquet of benefits is linked to political considerations ahead of the recent Lok Sabha elections and several state elections, Information and Broadcasting Minister Ashwini Vaishnaw dispelled it. Announcing the UPS, he emphasised that Congress-ruled states have announced a return to OPS but are yet to implement it, while Prime Minister Modi has ensured an outcome that will ensure “inter-generational equity”.
How have employees and states reacted to this? What will be the likely impact on finances?
Central government employees have broadly welcomed the UPS provisions as an acknowledgement of the problems of the NPS, but there are still doubts about the contributory aspects of the UPS and the lack of a commutation option like the OPS. Like employee representatives, economists too are awaiting more details about the contours and mathematics of the UPS. UPS contributions, including arrears for some, are expected to cost an additional ₹7,050 crore this year. Inflation hikes, whenever announced, will also guarantee additional funding. “Assured pensions in the future will add to the government’s committed expenditure, while reducing uncertainty for employees. This will have to be factored into the fiscal consolidation roadmap going forward,” commented Aditi Nayar, chief economist at ICRA.
Bank of Baroda chief economist Madan Sabnavis believes the immediate impact will only be an additional 4.5% contribution to UPS, but in the future the payout will be higher but may be absorbed by higher revenue growth. “We can consider it equivalent to pay commission revisions, which are absorbed by the system,” he said.
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