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With young government employees staring at the prospects of lower than 50% salary as pension, the Centre has now tweaked its existing scheme with a new Unified Pension Scheme (UPS). A defined assured pension, family pension and a minimum pension for those with less than the mandatory service for full pension are its key features.
In formulating the UPS, the TV Somanathan committee set up in April 2023 hasn’t quite jettisoned the basic reform characteristics of the National Pension System that was implemented for those joining government service from January 2004. It has sought to address the grievances of employees — the most important being stability of income and security to family — by raising the government’s contribution to the pension scheme to 18.5 per cent of the basic pay from 14 per cent now; the employee contribution remains 10 per cent of the basic pay as on date.
This will definitely cost the government more money — around Rs 6,250 crore in the first year. But this is more in the nature of filling the gap between the assured 50 per cent salary as pension and what the corpus (combined contraction of the employee and the government) would have earned during the years of service when invested in the default scheme by the pension fund manager.
The government also estimates an additional expenditure of Rs 800 crore towards arrears of already retired employees since the introduction of NPS in 2004.
Clearly, the UPS is a political response to the festering grouse among government employees, who form a vocal political constituency. The outcome of the general election and the prospects of a big challenge from the Opposition in the Assembly elections in Haryana, Maharashtra, and Jharkhand in the coming months may have also forced the government to open its purse strings a bit.
Also, the new UPS will close the route for states to revert to the Old Pension Scheme (OPS) as some of them did earlier. Most states are expected to adopt the new UPS structure for their employees; they may be willing to bear the extra cost given the fact that the Centre itself has done it. This is bound to strain the finances of the state governments.
Cabinet Secretary TV Somanathan, however, said the UPS is “definitely fiscally more prudent”. “It remains within the same architecture of contributory funded scheme. That is the critical difference. The OPS (old pension scheme) is an unfunded, non-contributory scheme, this is a funded, contributory scheme. The only difference in the changes made today (Saturday) is to give an assurance and not leave things to vagaries of market forces. But otherwise the structure of UPS has the best elements of both (OPS and NPS),” he said.
Under the OPS, government employees used to get defined benefits post retirement – 50 per cent of their last drawn salary as monthly pension. Under the NPS, which covers employees who joined service post January 2004, contributions are defined but benefits depend on the market. Last year, states of Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh had reverted to the OPS from NPS.
The new UPS has included features of an assured pension from the OPS as well as defined contributions from the NPS. UPS has features similar to OPS in the form of an assured pension, inflation indexation, family pension and minimum pension. From the NPS, the UPS has included the feature of contributory, fully funded scheme.
With assured pension expected to benefit over 23 lakh central government employees, states are also expected to join under the UPS. However, the additional strain on state government finances would require caution.
In January 2023, the Reserve Bank of India (RBI) had flagged concerns about strain on government finances for states opting to revert to OPS last year. The central bank had said that the OPS, instead of the NPS, will lead to the accumulation of liabilities which can become a major risk in the future.
As per the Budget estimates for 2022-23, states were expected to incur a 16 per cent rise in pension expenditure at Rs 4,63,436 crore in 2022-23 as against Rs 3,99,813 crore in the previous year, the RBI had said. The RBI had said that the pension outgo under the OPS is projected to touch over Rs 17 lakh crore under the OPS as against Rs 4 lakh crore under the NPS.
