Why did the Centre alter its pension plan?

There are five major components of the UPS benefits, starting with the assurance that government employees will receive half of their average basic pay drawn over their final 12 months in service prior to retirement, as a monthly pension for life. 
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The story so far: Last weekend, the Union Cabinet signed off on a major shift in the approach for providing old age income security to Central government employees, setting the stage for a new Unified Pension Scheme (UPS) to be launched on April 1, 2025. About 23 lakh Central government employees are expected to benefit from the new scheme, while those employees who are part of an ongoing pension scheme called the National Pension System (originally called the New Pension Scheme or NPS) will have a one-time option to switch to the UPS. States have been given the option to bring their employees under the UPS framework, and will need to work out the scheme’s funding from their own resources.

What are the benefits being offered under the UPS?

There are five major components of the UPS benefits, starting with the assurance that government employees will receive half of their average basic pay drawn over their final 12 months in service prior to retirement, as a monthly pension for life. This promise is subject to a minimum service of 25 years. The benefits will be proportionately lower for those with lesser service tenures, provided they served for least 10 years in government. The minimum pension amount at superannuation, has been set at ₹10,000 for those with 10 years of service. The UPS also offers a family pension equivalent to 60% of a government worker’s pension at the time of her or his demise, to support their dependents. To provide a hedge against inflation, these pension incomes will be raised in line with the consumer price trends for industrial workers — akin to the dearness relief allowance offered to serving government employees. Last but not the least, the UPS also promises a lumpsum superannuation payout in addition to gratuity benefits at the time of retirement. This will amount to 1/10th of an employee’s monthly emoluments, that is salary + dearness allowance, as on the date of superannuation for every completed six months of service.

How is this different from the current pension system?

Currently, government employees who joined service prior to January 1, 2004, are covered by what has come to be known as the Old Pension Scheme (OPS) that was replaced by the NPS for employees who joined in or after 2004.


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The OPS also offered employees an assured pension at 50% of last drawn salary, with dearness allowance hikes added along the way, an assured family pension of 60% of the last drawn pension, and a minimum pension of ₹9,000 plus dearness allowances. At the time of retirement, employees could commute 40% of the pension and receive it as a lumpsum. Moreover, for pensioners or family pensioners crossing 80 years of age, an additional 20% pension is given, with that number rising to 30% at 85 years, 40% at 90 years, and 50% at 95 years. Pension incomes are also revised in line with salary updates as per Pay Commission suggestions. The last salary upgrade for government employees kicked in from 2016, based on the Seventh Pay Commission recommendations. A critical difference between the OPS and NPS as well as the UPS, is that its promises were funded straight off the revenues of the government at the time of making payouts. So the liabilities of the OPS were “unfunded”, with no contributions made by employees or the employer, as is the case with non-government formal sector employees whose retirement savings are governed under by the Employees’ Provident Fund (EPF) Act.

The NPS, launched through an executive order by the Atal Bihari Vajpayee government after years of debate about the unsustainability of civil servants’ pension bills, did away with the defined benefits system of the OPS and switched to a ‘defined contribution’ pension regime. 10% of employees’ salaries were remitted to a pension account with a matching contribution from the employer (the Centre, or States as almost all of them switched to the NPS after 2004). These funds were pooled and deployed in market-linked securities, with the option of parking some funds in equity markets, by pension fund managers. At the time of retirement, employees were required to buy an annuity (an insurance instrument that provides a monthly income) with 40% of the accumulated corpus in their NPS account, and withdraw the rest. The Centre had raised its contribution to the NPS to 14% in 2019, but there was no element of certainty offered on NPS members’ pension incomes, like the OPS did. NPS members, including those who may have retired already, can now move to the UPS.

The UPS combines the defined benefit model of the OPS through its promised pension levels and other sops, with the defined contribution NPS mechanism. While employees’ contributions will be limited to 10% of salary as is the case with NPS, the government will contribute a higher 18.5% of salary to the pooled pension accounts. The Centre will also have to bear any gap between the eventual earnings on these contributions, and its assured pension promises under the UPS. It is not clear at this point if the UPS will factor in future Pay Commissions’ recommendations or offer higher pensions for those over 80 years of age, as the OPS did.

Why did the government opt for a change?

Prior to, and after, its launch, the NPS regime had faced a strong pushback from government employees over the loss of any assurance about their likely pension incomes, and the stark contrast in fortunes for post-2004 workers vis-à-vis their predecessors. While this clamour had persisted through the UPA years, the decibel levels against it mounted in recent years, especially as some of the early NPS entrants with fewer years of service started to retire with what they perceived as poor pension benefits. This restiveness eventually became an electoral issue, with Opposition parties such as the Congress promising a return to the OPS for State employees covered by the NPS ahead of some Assembly polls, and effecting the switch after gaining power in a few. The Centre, through the Narendra Modi government’s second innings, pushed back over this reform reversal by States terming these as fiscally irresponsible sops.

However, in March 2023, Finance Minister Nirmala Sitharaman announced a committee to review the NPS for government employees in a way that balances “their aspirations with fiscal prudence”. This panel, headed by former Finance Secretary T.V. Somanathan (now serving as Cabinet Secretary), held wide consultations with employees and other stakeholders, and although its report has not been made public yet, the switch to the UPS has been informed by its parleys. If there was any doubt that UPS’ bouquet of benefits is linked to political considerations after the recent Lok Sabha polls and ahead of several State polls, Information and Broadcasting Minister Ashwini Vaishnaw laid it to rest. While announcing the UPS, he emphasised that Congress-ruled States which announced a return to the OPS were yet to implement it, while Prime Minister Modi had ensured an outcome that will ensure “inter-generational equity”.

How have employees and States reacted? What is the likely impact on finances?

Central government employees have broadly welcomed the UPS provisions as an acknowledgement of the NPS’ problems, but there are still reservations about the contributory aspects of the UPS and the lack of a commutation option like the OPS. Like employee representatives, economists also await more details on the UPS’ contours and math. UPS contributions, including arrears for some, are expected to cost an additional ₹7,050 crore this year. Dearness hikes, as and when announced, will warrant additional funding too. “Assured pensions will add to the government committed expenditure in the future, while reducing the uncertainty for employees. This will have to be built into the fiscal consolidation roadmap going ahead,” remarked Aditi Nayar, ICRA’s chief economist.

While the immediate impact will only be the additional 4.5% contribution towards the UPS, future payouts will be higher but can be absorbed by higher revenue growth, reckoned Bank of Baroda chief economist Madan Sabnavis. “We can look at this as being equivalent to Pay Commission revisions which are absorbed by the system,” he averred.



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