Centre announces Unified Pension Scheme: How will UPS differ from OPS, NPS?

The Union Cabinet has approved the Unified Pension Scheme (UPS), which will guarantee pensions for government employees after they retire. This scheme will start from April 1, 2025.

• This move comes in response to criticism of the New Pension Scheme (NPS) from government employees, which has also been used by the Opposition for political leverage.
• Some states governed by the Opposition, such as Himachal Pradesh (2023), Rajasthan (2022), Chhattisgarh (2022), and Punjab (2022), have switched back to the Old Pension Scheme (OPS).

What Are the Main Components of the Unified Pension Scheme?

• Assured Pension: The UPS guarantees a pension amounting to 50% of an employee’s average basic pay from the last 12 months before retirement, provided they have a minimum qualifying service of 25 years. For shorter service periods, the pension amount will be reduced proportionately, down to a minimum of 10 years of service.
• Assured Minimum Pension: For those retiring after at least 10 years of service, the UPS includes a provision for an assured minimum pension of ₹10,000 per month.
• Assured Family Pension: If a retiree passes away, their immediate family will receive 60% of the last pension amount drawn by the retiree. 
• Inflation Indexation: All pensions under the UPS, including the assured pension, minimum pension, and family pension, will be adjusted for inflation based on the All India Consumer Price Index for Industrial Workers, similar to current employee adjustments.
• Lump Sum Payment at Superannuation: In addition to the gratuity, retirees will receive a lump sum payment calculated as 1/10th of their monthly emoluments (pay plus dearness allowance) for every six months of completed service at the time of retirement.

Enroll now for UPSC Online Course

Why was the NPS Introduced in 2004?

• Old Pension Scheme (OPS): The Old Pension Scheme (OPS) provided government employees with a pension calculated based on their last drawn salary, ensuring a predictable post-retirement income. 
• Challenges with OPS
• • Rising Pension Liabilities: While straightforward, the OPS became financially unsustainable over time due to a significant flaw—it was an unfunded system. There was no dedicated corpus set aside to meet future pension liabilities, meaning the pensions were paid out of current government revenues.
  • Sustainability Concerns: As more employees retired and life expectancy increased due to better healthcare, the government’s pension obligations grew exponentially. This escalating financial burden strained public finances, making the OPS fiscally untenable in the long term. 
  • Impact of Globalization, LPG Reforms, and Pay Commission Hikes: The economic landscape also changed significantly with the Liberalization, Privatization, and Globalization (LPG) reforms of the early 1990s. These reforms led to an expansion of the economy, but also introduced new fiscal pressures. Additionally, the recommendations of successive Pay Commissions, which aimed to improve the salaries and pensions of government employees, further amplified the financial obligations under the OPS.
    • 1990-91 Figures: In 1990-91, the Centre’s pension bill was ₹3,272 crore, while the combined pension outgo for all states was ₹3,131 crore.
    • 2020-21 Figures: By 2020-21, the Centre’s pension bill had increased 58-fold to ₹1,90,886 crore, and for states, the pension outgo had risen 125-fold to ₹3,86,001 crore. These staggering increases illustrate the growing fiscal strain caused by the OPS.

What Was the NPS? What Was the Basis of Opposition to It?

• Key Features of the NPS:
  • No Assured Pension: Unlike the Old Pension Scheme (OPS), the NPS did not guarantee a fixed pension amount.
  • Employee-Funded: The NPS required contributions from both the employee and the government. Employees contributed 10% of their basic pay and dearness allowance, while the government contributed 14% (later increased to 18%).
  • Pension Fund Managers: The NPS offers schemes through nine pension fund managers, including SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max. 
  • Risk Profiles: These schemes vary in risk from ‘low’ to ‘very high’, allowing individuals to choose based on their risk tolerance.
• Investment Choices: Individuals under the NPS could select from various investment options, ranging from low to high risk, and choose pension fund managers from both public and private sectors.
• Issues with NPS:
  • Lower Assured Returns: Government employees faced lower assured returns under the NPS compared to the OPS.
  • Employee Contributions: The NPS required employee contributions, unlike the OPS, which did not involve employee funding.
• Basis of Opposition:
  • Lack of Guaranteed Pension: The main opposition to the NPS was due to the absence of a guaranteed pension, which was a significant shift from the OPS.
  • Funding Responsibility: The shift to a scheme funded by the employee and the government, rather than a pre-existing corpus, was also a point of contention.

Check Out UPSC CSE Books From PW Store

Who Can Avail the Unified Pension Scheme?

• Effective Date: The Unified Pension Scheme (UPS) will be implemented from April 1, 2025.
• Eligibility: The UPS will apply to individuals who have retired under the National Pension System (NPS) from 2004 onwards.
• Arrears Adjustment: Retirees under the NPS will have their arrears adjusted with the amounts they have already received under the NPS.
• Preference: According to Cabinet Secretary TV Somanathan, the UPS is expected to be more beneficial than the NPS for over 99% of retirees. While most will prefer the UPS, there will be an option for those who choose to remain under the NPS.
• Applicability: The UPS is currently applicable to central government employees, but states also have the option to adopt the scheme.

Difference Between UPS and OPS

• Financial Impact: The implementation of the UPS is expected to incur an expenditure of ₹800 crore for arrears and approximately ₹6,250 crore in the first year. Despite this, the UPS is considered more fiscally prudent.
• Scheme Structure:
  • UPS (Unified Pension Scheme):
    • Funded Contributory Scheme: The UPS operates on a contributory basis where both the employee and government make contributions, creating a funded scheme.
  • OPS (Old Pension Scheme):
    • Unfunded Non-Contributory Scheme: The OPS is an unfunded scheme where pensions are provided without prior contributions, relying on government revenue at the time of payment.

Enroll now for UPSC Online Classes

Conclusion

The Unified Pension Scheme (UPS) aims to address the shortcomings of the National Pension System (NPS) by providing a guaranteed pension, unlike the NPS’s defined contribution model. While the UPS offers a more assured and predictable retirement benefit, it retains the financial prudence of a contributory scheme. As it replaces the Old Pension Scheme (OPS), it represents a significant shift toward more sustainable pension reform.

DOWNLOAD PDF