Unified Pension Scheme (UPS), Key Features and Significance

On August 24, 2024, the Union Cabinet approved the Unified Pension Scheme (UPS), marking a significant shift in the pension framework for government employees. Scheduled to be implemented from April 1, 2025, the UPS aims to address employee dissatisfaction with the existing National Pension System (NPS) by combining elements of the Old Pension Scheme (OPS) with the contributory nature of the NPS. This article provides a detailed examination of the UPS, including its eligibility criteria, key features, benefits, and its distinction from the NPS.

Unified Pension Scheme (UPS)

The UPS represents a hybrid pension model designed to offer a more stable and predictable retirement income for government employees. It integrates a defined benefit component, akin to the OPS, with the contributory aspects of the NPS, aiming to balance fiscal sustainability with employee welfare.

Unified Pension Scheme (UPS) Objectives

• Enhance Pension Security: Provide a guaranteed pension to ensure financial stability for retirees.
• Maintain Fiscal Responsibility: Balance employee benefits with fiscal sustainability.
• Address Employee Dissatisfaction: Improve upon the NPS to address concerns over pension adequacy and contributions.

Unified Pension Scheme Eligibility Criteria

• Existing Employees:
  • Must have completed a minimum of 10 years of service to be eligible.
  • Employees with at least 25 years of service will receive the full benefits of the UPS.
  • The scheme is optional for those already under the NPS or opting for the Voluntary Retirement Scheme (VRS).
• Future Employees:
  • New recruits will have the option to join the UPS.
  • Once opted into the UPS, the decision is irrevocable.
• Past Retirees:
  • Employees who retired under the NPS since January 1, 2004, will have their arrears adjusted with past NPS withdrawals and receive interest calculated at Public Provident Fund (PPF) rates.

Key Features of UPS

• Assured pension: Government employees will get 50% of the average basic pay drawn over the last 12 months prior to superannuation.
  • Minimum tenure of service for pension – 25 years
• Assured Minimum pension: A minimum pension of ₹10,000 per month is assured for those who complete at least 10 years of central government service.
• Family pension: The next of kin of the deceased employee will receive 60% of the pension that the employee was getting just before his/her death.
• Superannuation payout: A lump sum payment in addition to gratuity benefits will be provided at the time of retirement.
• Dearness Relief: based on All India Consumer Price Index for Industrial Workers (AICPI-IW) for in-service employees.
• Contributions under UPS:
  • Employees: 10% of their salary.
  • Government: 18.5% of the salary.
• Beneficiaries: UPS applies to all those who retired under the NPS from 2004 onwards and is currently applicable to Central Government Employees only.

Unified Pension Scheme (UPS) vs Old Pension Scheme (OPS)

Comparison with National Pension System (NPS)

Here’s a comparison between the Unified Pension Scheme (UPS) and the National Pension System (NPS):

Challenges Associated with Unified Pension Scheme (UPS)

• Increased Government Co-Contribution: It raises the government’s co-contribution rate to 18.5%, up from the original 10% when the NPS was introduced.
  • This increase further strains public finances, adding to the already growing expenditure on pensions and other retirement benefits (PORB) for current pensioners under the Old Pension Scheme (OPS).
• Failure to Address Coverage Expansion: It does little to expand the coverage of the Old Age Income Support (OAIS) system.
  • Example: 80% of workers (over 380 million) remain excluded from institutional OAIS, and 60% of the elderly (over 85 million) do not receive OAIS benefits from public expenditure.
• Intra-Generational Inequity: The scheme exacerbates inequities within the same generation.
  • Over three-fourths of public expenditure on OAIS benefits less than one-seventh of the elderly, specifically those from government service.
  • This creates a disparity where a small, privileged group continues to receive significant benefits, while the majority of workers and elderly remain underserved.
• Several provisions in the UPS are seen as overreaching and potentially unfair:
  • Encashment of Earned Leaves: Dilutes the purpose of promoting work-life balance.
  • Lump-Sum Commutation of Pensions: Allows for an advance drawal of future income, raising concerns about its appropriateness.
  • Absence of Minimum Age for Benefits: Some benefits could be accessed before the age of 40, which contradicts the principle of retirement support.
  • Peak Emoluments Basis: Using only peak earnings for pension calculations may not fairly reflect a worker’s entire career contributions.
  • Indexation to Current Workers’ Emoluments: Linking pension benefits to current salaries can distort labour market incentives and further strain public resources.
• Neglect of the Majority’s Voice: The focus on a small percentage of government employees, who make up only 3.5% of all workers, has led to a lack of attention to the broader population’s needs in the pension system.

Conclusion

While the government’s recent announcement may appear as an assertive effort to uphold the pension reforms initiated in 2003 and reinvigorate the PFRDA’s role, it faces significant challenges. To address these inequities and ensure a fairer distribution of public resources, it is imperative to amplify the voices of these marginalised groups and redefine the social contract governing old age income support in India.

Key Takeaways for UPSC Preparation

• Understand the Objectives: Grasp the rationale behind the UPS and its objectives in balancing employee benefits with fiscal responsibility.
• Compare with Existing Schemes: Familiarize yourself with the differences between the UPS and the NPS, as well as their implications for retirees.
• Fiscal Analysis: Analyze the fiscal implications of the UPS, including costs and sustainability.
• Implementation Details: Be aware of the implementation timeline and potential expansion to state governments.

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