Unified Pension Scheme Launched: Comparing UPS with OPS and NPS"

 T.V. Somanathan, the former Finance Secretary who chaired the committee responsible for developing the Unified Pension Scheme (UPS), stated that the new pension plan combines the most effective features of both the National Pension System (NPS) and the Old Pension Scheme (OPS). 

Here's an overview of its implementation:

On Saturday, August 24, the Union Cabinet approved the UPS, which aims to provide government employees with a guaranteed pension after retirement. The government announced that the scheme will come into effect starting April 1, 2025.

This development comes in the wake of significant discontent among government employees regarding the New Pension Scheme (NPS), a sentiment that the Opposition has leveraged for political advantage. States governed by the Opposition, such as Himachal Pradesh (in 2023), Rajasthan (in 2022), Chhattisgarh (in 2022), and Punjab (in 2022), have responded by reverting to the Old Pension Scheme (OPS). As a result, with the upcoming Assembly elections in Jammu & Kashmir, Haryana, Maharashtra, and Jharkhand (with schedules for the latter two yet to be announced), the Centre's introduction of a new pension scheme marks a crucial political move.

Context Behind the Implementation of the UPS

What to Know About the UPS

Importantly, the UPS offers retirees a guaranteed pension amount, addressing a key criticism government employees had with the NPS. Union Information and Broadcasting Minister Ashwini Vaishnaw highlighted that the UPS includes five main features.

Assured minimum pension: An assured pension would be calculated as 50% of an employee's average basic pay over the last 12 months prior to retirement, provided the employee has a minimum of 25 years of qualifying service. For those with less service, but at least 10 years, the pension amount would be reduced proportionately.

Assured family pension:In the event of a retiree's death, the immediate family would be entitled to receive 60% of the last pension amount drawn by the employee

Inflation indexation: Dearness relief will be provided for the three mentioned pensions, and it will be calculated based on the All India Consumer Price Index for Industrial Workers, similar to how it is determined for current employees.

Assured minimum pension: In the case of superannuation after a minimum 10 years of service, the UPS has a provision of an assured minimum pension of Rs 10,000 per month.

Lumpsum payment at superannuation: In addition to gratuity, this will be calculated as 1/10th of the monthly emolument (including pay and dearness allowance) at the time of retirement, for every six months of completed service.

Why was the NPS introduced in 2004?

On January 1, 2004, the National Pension System (NPS) replaced the Old Pension Scheme (OPS) as part of the Centre’s pension reform efforts in India. Individuals who joined government service after this date were placed under the NPS.

Under the OPS, pensions for government employees (both at the Centre and the states) were set at 50% of the last drawn basic pay, similar to the current UPS system. Additionally, a Dearness Allowance (DA), calculated as a percentage of the basic salary, was provided to address the rising cost of living.

The NPS was introduced by the Atal Bihari Vajpayee government to address a major issue with the OPS — its unfunded nature, meaning there was no dedicated pension corpus. This resulted in the government’s pension liabilities growing to unsustainable levels, especially as improved healthcare led to longer lifespans. The OPS proved to be financially unviable over the long term.

Data indicates that pension liabilities for both the Centre and the states have increased significantly over the past three decades. In 1990-91, the Centre’s pension expenditure was Rs 3,272 crore, while the total for all states was Rs 3,131 crore. By 2020-21, the Centre’s pension expenses had surged 58-fold to Rs 1,90,886 crore, and state expenditures had risen 125-fold to Rs 3,86,001 crore.

What was the NPS? What was the basis of the opposition to it?

The NPS introduced two fundamental changes. First, it eliminated the guarantee of a fixed pension. Second, it established a funded scheme where contributions are made by both the employee and the government. Initially, the employee's contribution was 10% of their basic salary and dearness allowance, with the government matching this amount; this contribution rate increased to 14% in 2019

Under the NPS, individuals can select from various schemes, ranging from low to high risk, managed by pension fund managers from public sector banks, financial institutions, and private companies. Nine pension fund managers, including SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max, offer these schemes. The risk profiles of the schemes vary widely. For instance, the 10-year return for the NPS Central Government scheme managed by SBI, LIC, and UTI was 9.22%, the 5-year return was 7.99%, and the 1-year return was 2.34%. High-risk schemes can yield returns up to 15%.

For government employees, the NPS not only offered lower guaranteed returns compared to the OPS, but it also required employee contributions, which was not a feature of the OPS. This aspect contributed to the opposition against the NPS.

In response to these concerns, Prime Minister Narendra Modi established a committee chaired by Cabinet Secretary TV Somanathan (then Finance Secretary) in 2023. The committee conducted over 100 meetings with various organizations and states. The recommendations from this committee have led to the introduction of the new UPS.

Who can avail the UPS?

The new UPS will take effect from April 1, 2025, and will apply to all those who have retired under the NPS since 2004, according to Somanathan. He noted that for these NPS retirees, their arrears will be adjusted against the amounts they have already received under the NPS.

Somanathan indicated, “In over 99 percent of cases, it will be more advantageous to switch to the UPS rather than remain under the NPS… almost no one will prefer to stay in the NPS, though we are providing the option.” This implies that while employees can choose to stay in the NPS, it is expected to be less favorable for them.

Currently, the scheme is applicable to Central government employees, but states have the option to adopt it as well, Somanathan added.

What is the difference between UPS and OPS?

Somanathan stated that the cost for arrears will be Rs 800 crore, and the first year of implementing the UPS will require approximately Rs 6,250 crore from the exchequer. However, he emphasized that the UPS is still more financially prudent.

He explained that while the OPS was an unfunded, non-contributory scheme, the UPS is a funded, contributory scheme. Employee contributions are set to increase to 18.5%. Somanathan noted that the key change in the UPS is the assurance of pension benefits, moving away from reliance on market fluctuations. He described the UPS as combining the best features of both the OPS and NPS.