27-August-2024-Editorial

UNIFIED PENSION SCHEME

The Union Cabinet has approved the Unified Pension Scheme (UPS), designed to provide government employees with an assured pension after retirement. The scheme is scheduled to come into effect on 1st April 2025, shifting central government employees from the current National Pension System (NPS) to the UPS.

This new pension framework offers enhanced benefits and aims to address concerns about NPS while avoiding the fiscal challenges posed by the Old Pension Scheme (OPS). State governments also have the option to adopt the UPS.

Key Provisions of the Unified Pension Scheme

Assured Pension

• 50% of the last year’s average basic pay drawn in the last 12 months before retirement will be offered as the pension.
• This benefit requires a minimum of 25 years of service.
• Employees with a service period of less than 25 years but a minimum of 10 years will receive a proportionally reduced pension.

Assured Minimum Pension

• Employees retiring after a minimum of 10 years of service will be assured a minimum pension of Rs 10,000 per month.

Family Pension

• In the event of the retiree’s death, their immediate family will be entitled to 60% of the last drawn pension.

Inflation-Adjusted Pension

• Pension amounts will be adjusted for inflation through Dearness Relief (DR).
• Adjustments will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW).

Lumpsum Payment at Retirement

• In addition to gratuity, retirees will receive a lump sum payment equivalent to 1/10th of their monthly pay plus DA for every completed six months of service.
• This lump sum payment will not affect the pension amount.

Employee Choice

• Employees have the option to remain under the NPS. Once this choice is made, it cannot be reversed.

Comparison: UPS, OPS, and NPS

Pension Calculation

• OPS: Pension was 50% of the last drawn basic salary plus Dearness Allowance (DA).
• UPS: Pension is 50% of the average basic pay plus DA from the last year of service, which can result in slightly lower pension amounts for employees receiving promotions just before retirement.
• NPS: Pension amounts are market-linked and based on contributions and returns from investments.

Employee Contributions

• OPS: No contributions were required from employees.
• UPS: Employees contribute 10% of basic pay, while the government contributes 18.5%.
• NPS: Employee contributions are set at 10% of basic pay, and the government contributes 14%.

Tax Benefits

• OPS: No employee contributions, thus no tax benefits.
• UPS: Tax benefits under UPS are yet to be clarified by the government.
• NPS: Central government employees can avail tax deductions on the government’s 14% contribution under the Income Tax Act, 1961.

Minimum Pension

• OPS: The minimum pension was Rs 9,000 per month.
• UPS: The minimum pension is Rs 10,000 per month after a 10-year service period.

Lumpsum Payments

• OPS: Up to 40% of the pension could be commuted into a lump sum, reducing the monthly pension amount.
• UPS: Provides a lump sum payment at retirement without reducing the monthly pension.

The National Pension System (NPS)

The National Pension System is a contributory pension scheme introduced in 2004 to address the growing fiscal burden from the Old Pension Scheme (OPS). It is a market-linked pension plan where employees contribute a percentage of their basic salary along with a matching contribution from the government.

Key Features

• Funded by Contributions: Employees contribute 10% of their basic pay along with 14% from the government.
• Investment Choices: Individuals can select from various pension fund managers and schemes for investment.
• Lower Guaranteed Returns: NPS does not provide guaranteed returns like OPS, as it is market-driven.

Opposition to NPS

• Many employees expressed dissatisfaction with the lower returns and the requirement to contribute to their pension.
• Calls for returning to the Old Pension Scheme (OPS) led to the formation of a committee in 2023, which ultimately resulted in the introduction of the Unified Pension Scheme (UPS).

Fiscal Implications of UPS

Debt-to-GDP Ratio

• The introduction of UPS may exacerbate the government’s already high debt-to-GDP ratio.
• Pension liabilities are expected to grow, potentially placing a significant strain on public finances.

Increased Fiscal Burden

• According to a Reserve Bank of India (RBI) study (2023), if all states switch to OPS, the fiscal burden could multiply up to 4.5 times compared to NPS, reaching 0.9% of GDP annually by 2060.
• UPS, which shares features with OPS, is likely to create similar fiscal pressures.

Conclusion

The Unified Pension Scheme (UPS) strikes a balance between the fiscal sustainability of the National Pension System (NPS) and the employee benefits of the Old Pension Scheme (OPS). By offering assured returns and inflation protection, UPS aims to provide government employees with greater financial security after retirement. However, its fiscal impact will need to be carefully managed to avoid creating unsustainable pension liabilities in the future. The UPS brings a significant shift in pension policy, aiming to improve long-term financial planning while addressing employee concerns.