Unified Pension System an improvement over NPS not at par with OPS

By – Prof Rajkumar Giridhari Singh
The announcement of the Unified Pension System (UPS) on Saturday, 24th August, 2024, by the Union Minister of Information and Broadcasting and the Railway Minister Ashwini Vishnaw following approval from the Prime Minister Narendra Modi-led cabinet, is a significant boost for government employees, as the new system will guarantee pensions for retirees starting from April 2025.India’s pension scheme has evolved considerably over the years, and the recent approval and announcement of the UPS mark a notable milestone in this evolution. The UPS addresses the concerns of government employees who have long advocated for a more secure pension plan. The National Democratic Alliance (NDA) government had replaced the Old Pension Scheme (OPS) with the New Pension Scheme (NPS) in 2004. Since then, many employees’ unions and the Joint Forum for the Restoration of the Old Pension Scheme (NJCA) have been urging the Finance Ministry to reinstate the non-contributory and guaranteed OPS, moving away from the contributory NPS that currently applies to government employees and autonomous bodies.
The National Pension System (NPS) is a voluntary scheme managed by the Pension Fund Regulatory and Development Authority (PFRDA) aimed at providing citizens with a stable and secure retirement income. Launched on January 1, 2004, NPS is a contributory pension plan. In May 2009, the government expanded NPS to include all citizens, such as self-employed individuals and workers in the informal sector. Under NPS, individuals can make monthly contributions until they turn 60 and receive a pension upon retirement. The minimum monthly contribution is Rs. 500, though it can be increased based on individual preferences. For government employees, the contribution is 10% of their basic salary plus Dearness Allowance (DA), with the government matching this with a 14% contribution of the basic salary plus DA each month. Unlike the OPS, which is non-contributory and offers guaranteed pensions, NPS is contributory and does not guarantee a minimum pension amount. Additionally, NPS does not provide a family pension upon the death of the pensioner. In contrast, OPS offers a family pension to the spouse, unmarried daughters, divorced daughters, widow daughters, and dependent children with physical or mental disabilities after the pensioner’s death.
The Unified Pension Scheme is structured around five key pillars: Assured Pension, Assured Family Pension, Assured Minimum Pension, Inflation Indexation, and Gratuity. Under the Unified Pension Scheme (UPS), a fixed assured pension is provided, unlike the New Pension Scheme (NPS) which does not guarantee a specific pension amount. Individuals under the UPS will be eligible to receive 50% of their average basic pay earned during the last 12 months before retirement. To qualify for this benefit, individuals must have completed at least 25 years of service. For those with fewer years of service, the pension amount will be adjusted proportionately, with a minimum of 10 years of service required to be eligible for the pension and a guaranteed minimum pension of Rs 10,000 per month. Additionally, the retirement benefits package includes an assured family pension, which is 60% of the employee’s basic pay. This pension will be disbursed promptly in the event of the employee’s passing. The indexation benefit is a provision that applies to assured pension, assured family pension, and assured minimum pension. This benefit ensures that these pensions are adjusted to keep up with inflation and changes in the cost of living over time. When indexed, these pensions are periodically reviewed and adjusted to maintain their real value and purchasing power for the beneficiaries. Upon retirement, an employee will receive a lump-sum payment along with gratuity. This lump-sum payment, calculated as one-tenth of the monthly emolument (including both pay and dearness allowance) for every six months of completed service up to the date of retirement, does not reduce the amount of the assured pension. Additionally, the government plans to increase its contribution to the pension fund from the current 14% of basic pay (under the NPS) to 18.5%. However, the contribution rate for existing employees, currently set at 10%, will remain unchanged.
Peace of mind is immensely determined by reliable financial support. Pension helps the employees to make themselves financially stable after their retirement. The introduction of UPS is a positive step to bring harmony between old and new schemes which have the best elements of both OPS and NPS. Everyone desires a relaxed and carefree retirement. The UPS have now addressed the grievances of the employees specifically the stability of income and security to family. It is heartening that UPS will be applicable to all those who have retired under the NPS from 2004 onwards
A clearer understanding of the new Unified Pension Scheme (UPS) will emerge once more details are available, including the mechanism for addressing the settlement of existing employees under the New Pension Scheme (NPS) who have withdrawn 25% of their contributions as permitted by NPS 2009. It is important to determine whether the tax-free lump sum of 60% of the corpus, available under the NPS, will also be provided to those who opt for the UPS. For government employees seeking financial security and stability, the UPS may present a more appealing choice due to its guaranteed benefits and inflation protection.It can be rightly opined that UPS is an improvement over the market linked unsecure NPS regime but not at par with OPS.
(The author is currently Head and Professor, Department of Commerce, North Eastern Hill University, Shillong. Can be reached at [email protected])