Unified Pension Scheme

Context

• Recently, the Union Cabinet, chaired by the Prime Minister, approved the Unified Pension Scheme (UPS) by replacing the National Pension System ( NPS )

About

• It is based on the recommendations of T. V. Somanathan Committee (2023), will be effective from April 1, 2025.
• The UPS proposes to amalgamate advantages of both Old Pension Scheme (OPS) and New Pension Scheme (NPS).
• It represents a forward-looking approach to retirement planning in India, aiming to provide a secure and sustainable pension system for all eligible employees.
• It aims to provide long-term financial security to government employees while maintaining flexibility and choice.

Key Features of Unified Pension Scheme (UPS)

1. Guaranteed Pension: Of 50% of their last drawn salary as a lifelong monthly pension.
2. Inflation indexation: Dearness relief calculated based on All India Consumer Price Index for Industrial Workers will be available on these three kinds of pensions, as in the case of serving employees.
3. Family Pension: In case of an employee’s death, the family will receive 60% of the pension amount.
4. Lumpsum Superannuation Payout: Additional payout at retirement, alongside gratuity benefits.
5. Minimum Pension: ₹10,000 per month for those with at least 10 years of central government service.
6. Contribution: The UPS scheme is contributory, similar to the NPS, and is funded by contributions from both employees (10% of their salary) and the government (18.5% of the salary). The government’s contribution may be adjusted on periodic actuarial assessments to ensure the scheme’s sustainability.

Old Pension Scheme (OPS)

• OPS pension to government employees at the Centre and States was fixed at 50% of their last drawn basic pay. In addition, a Dearness Relief was given to adjust to the increase in cost of living which was calculated as a percentage of the basic salary.
• However, it was unfunded as no corpus was specifically available for pension which led to the introduction of New Pension Scheme in 2004 by the NDA government.

New Pension Scheme (NPS)

• NPS replaced the OPS on January 1, 2004 as a part of Centre’s effort to reform pension policies in India as OPS could not run in long term as it imbalances fiscal expenditure.
• NPS contribution: 10% of the basic salary and dearness allowance by the employees and 14% by government (which is proposed to be increased to 18% under UPS).
• Schemes under NPS is offered by nine pension fund managers: LIC, SBI, ICICI, Tata, Aditya Birla, Kotak Mahindra, HDFC, UTI and Max.

Difference between OPS, NPS and UPS

• OPS pension to government employees at the Centre and States was fixed at 50% of their last drawn basic pay in addition to a Dearness Relief calculated as a percentage of the basic salary to adjust to the increase in cost of living but it was unfunded as no corpus was specifically available for pension..

OPS	NPS	UPS
50% of the last drawn salary which increases with Dearness Allowance hikes.	NPS linked pension to contributions invested in market securities.	50% of average basic pay over last 12 months before retirement.
Contribution: Government bears the entire cost.	Contribution: 10% of the basic salary and dearness allowance by the employees and 14% by government.	Contribution: 10% of their salary by employees and 18.5% of the salary by the government
Family pension: Continued pension benefits to family after retiree’s death	Family pensions: Depends on the accumulated corpus and annuity plans of retirement.	Family pensions: Provides 60% of the employee’s pension to their family in the event of their death.
Inflation indexation: Pension increases with increase in Dearness Allowance,	Inflation indexation: Not applicable as it is market-linked.	Inflation indexation: Dearness relief calculated based on All India Consumer Price Index for Industrial Workers.

CBL Practice Questions for Prelims

The Unified Pension Scheme (UPS) was introduced to address the pension requirements of which of the following?

1. Central government employees recruited after 1st January 2004.
2. State government employees.
3. Employees in the unorganized sector.
4. Public sector employees.

Select the correct answer:

• (a) 1 and 2 only
• (b) 2 and 3 only
• (c) 1 and 4 only
• (d) 1, 2, 3, and 4

Answer: (a) 1 and 2 only

CBL Mains Practice Question

Critically examine the impact of the National Pension System (NPS) on the financial security of Indian government employees post-retirement. In your answer, discuss how the Unified Pension Scheme (UPS) has addressed the limitations of the earlier pension system.(15 marks)

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