The Finance Minister has notified the Unified Pension Scheme (UPS) as an option under the National Pension Scheme (NPS) on 24th January, 2025. (Representational Image)Take a look at the essential concepts, terms, quotes, or phenomena every day and brush up your knowledge. Here’s your knowledge nugget for today.
(Relevance: Pension schemes are important for both the General Studies II and III papers. In the Prelims, a direct question was asked about the National Pension System (NPS) in 2017. Similarly, in 2016, a question was asked about the Atal Pension Yojana. With the notification of this new scheme, it becomes important for you to understand why it was introduced and why there was a need to replace the Old Pension Scheme.)
The Finance Ministry notified the Unified Pension Scheme (UPS) on 24 January as an option under the National Pension System (NPS) for central government employees who joined on or after January 1, 2004. The scheme was given a nod in August last year. UPS, which will come into effect on April 1, is expected to benefit over 23 lakh central government employees.
1. The National Pension Scheme (NPS) replaced the Old Pension Scheme (OPS) on January 1, 2004. However, there have been persistent demands for a return to the OPS because for government employees, the NPS not only gave lower assured returns, it also implied employee contributions — which was not the case with the OPS. In 2023, the government constituted a committee chaired by then Finance Secretary (now Cabinet Secretary) T.V. Somanathan. Its recommendations led to the announcement of the UPS.
2. Like the OPS, the UPS provides a guaranteed pension. It aims to give stability, dignity, and financial security to government employees after retirement, assuring their well-being and a secure future. More importantly, the UPS promises retirees a fixed pension, unlike the NPS. This was one of the major criticisms of the NPS.
Key features of UPS:
i. Assured Pension: The scheme provides an ‘Assured Pension’, which will be calculated at 50 per cent of the average basic pay drawn over the last 12 months by the employee, prior to superannuation or before their retirement, for a minimum qualifying service of 25 years. The pension will be proportionate for a lesser service period up to a minimum of 10 years of service.
ii. Assured minimum pension: The UPS guarantees a monthly pension of Rs 10,000 for superannuation after at least 10 years of service.
iii. Assured family pension: If a retiree dies, their immediate family is entitled to 60% of the pension last taken by the retiree.
iv. Inflation indexation: Dearness relief for three types of pensions will be determined using the All India Consumer Price Index for Industrial Workers, which is similar to serving workers.
v. Lumpsum payment at superannuation: In addition to gratuity, lump-sum payment will be given at superannuation. This will be one-tenth of the monthly emolument (pay + DA) as on the date of superannuation for every completed six months of service. The payment will not reduce the quantum of assured pension.
vi. Pension assurance for compulsorily retired employees: The UPS will also be available for employees compulsorily retired under fundamental rule 56 (j), which is not a penalty under central civil services rules, the notification said. However, assured payout will not be available in case of removal or dismissal from service or resignation of the employee. “In such cases, the Unified Pension Scheme option shall not apply,” it said.
vi. Contribution to the Scheme: There will be two funds under the UPS: one, an individual corpus with employee contribution and matching central government contribution; and two, a pool corpus with additional central government contribution.
The contribution of employees will be 10 per cent of (basic pay + Dearness Allowance (DA) with an equivalent matching central government contribution. Both will be credited to each employee’s individual corpus. Separately, the central government will provide an additional contribution of an estimated 8.5 per cent of (basic pay + DA) of all employees who have chosen UPS, to the pool corpus on an aggregate basis.
vii. Choice of investment: The employees will be able to make investment choices for the individual corpus only, which would be regulated by the Pension Fund Regulatory and Development Authority (PFRDA). There will also be a ‘default pattern’ of investment defined by PFRDA. The investment decisions for the pool corpus will be taken solely by the central government.
What was the OPS?
Pension to government employees at the Centre as well as states was fixed at 50 per cent of the last drawn basic pay. The attraction of the OPS lay in its promise of an assured or ‘defined’ benefit to the retiree. In addition, there was Dearness Relief — calculated as a percentage of the basic salary — to adjust for the increase in the cost of living. It was hence described as a ‘Defined Benefit Scheme’. There was no contribution from the employee.
To illustrate, if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000. Also, like the salaries of government employees, the monthly payouts of pensioners also increased with hikes in dearness allowance or DA announced by the government for serving employees.
1. Under the NPS, which covers employees who joined service post January 2004, contributions are defined but benefits depend on the market.
2. The main problem was that the pension liability remained unfunded — that is, there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments. The Government of India budget provided for pensions every year; there was no clear plan on how to pay year after year in the future. The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
3. The OPS was also unsustainable. For one, pension liabilities would keep climbing since pensioners’ benefits increased every year; like salaries of existing employees, pensioners gained from indexation, or what is called ‘dearness relief’ (the same as dearness allowance for existing employees). And two, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
4. Data show that over the last three decades, the pension liabilities of the Centre and states have jumped manifold. In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and that of all states put together was Rs 3,131 crore. By 2020-21, the Centre’s pensions bill had jumped 58 times to Rs 1,90,886 crore; for states, it had shot up 125 times to Rs 3,86,001 crore.
(Source: What is Unified Pension Scheme (UPS) 2024,Centre announces Unified Pension Scheme: How will UPS differ from OPS, NPS?, Why the Old Pension Scheme is both bad economics and bad politics)
Subscribe to our UPSC newsletter. Stay updated with the latest UPSC articles by joining our Telegram channel – IndianExpress UPSC Hub, and follow us on Instagram and X.
🚨New Year Special: Click Here to read the January 2025 issue of the UPSC Essentials monthly magazine. Share your views and suggestions in the comment box or at manas.srivastava@indianexpress.com🚨
7 min read
