Just about 1% of the 2.7 million central government staff have opted for the Unified Pension Scheme (UPS). The perceived fewer benefits as compared to the Old Pension Scheme as well as the National Pension System have led to the hesitation, explains Saikat Neogi
l Reasons for cold response to UPS
THE UPS WAS announced in April 2024 as a response to the demand from a section of employees and opposition parties for restoration of the Old Pension Scheme (OPS), which had been replaced by the National Pension System (NPS) in 2004. Under UPS, an employee has to contribute 10% and the government contributes 18.5%. It provides a guaranteed pension of 50% of the average of the basic pay for the 12 months prior to retirement to those with 25 years or more of service. This pension is fully indexed to inflation. A minimum pension of Rs 10,000 a month is paid to employees with 10 years or more of service.On the pensioner’s death, 60% of the last drawn pension is paid to their family.
However, dissatisfaction about the long service period, monthly contribution, limited benefits in case of early retirement and limited definition of family to get pension in UPS led to only around 1% of the 2.7 million central government staff opting for UPS. The lack of clarity about benefits in case of death during service, taxation and anxiety around the costs vs benefits, before switching to UPS, as once exercised it was irreversible, contributed to the hesitation.
l What the govt has done to sweeten the deal
IN JULY, THE Centre extended the income tax benefits available under the market-linked NPS to the UPS, including tax-free withdrawal of 60% of corpus at superannuation. It also extended the benefits of the OPS in the event of death of the government employee or discharge from service on account of invalidation or disablement. The Centre has also extended the benefit of retirement gratuity and death gratuity to staff under UPS. It also extended the deadline to switch from NPS to UPS from June 30 to September 30. Last week, it introduced a one-time one-way switch facility from UPS to NPS. It can be exercised by an UPS optee any time up to one year before superannuation or three months prior to the deemed date of retirement in case of voluntary retirement. However, the switch facility will not be allowed in case of removal, dismissal or compulsory retirement. After the switch, the employee will not be eligible for assured payouts.
l Fiscal implications of UPS
THE UPS IS designed in such a manner that it doesn’t inflict an unmanageable cost on government finances. Additional outgo due to the guarantee element was estimated at only Rs 8,500 crore in FY26, with gradual increases over time, as the pay scale gets revised and new people join service. However, a general control on new additions to the staff strength is expected to put a lid on expenses. As people retire under UPS from 2036 onwards, and some of them as well as family pensioners die in the natural course, their pension capital amount would not be returned to the heirs of the employees. This would help augment the government’s resources to fund pensions without relying too much on the Budget in future. Basic pension will not be reset after each Pay Commission award as was the case under the OPS.
l Pension for state govt employees
BARRING WEST BENGAL, all states have signed up for the NPS based on defined contribution, for their employees from 2004. However, of late, states such as Punjab, Rajasthan, Chhattisgarh, Jharkhand, and Himachal Pradesh have reverted to the OPS, as these were ruled by non-NDA parties at that time. The OPS is based on a defined benefit plan. Employees are not required to contribute during their service and state governments will have to pay the pension —50% of the employees’ last-drawn salary— from their own budget.
In fact, a RBI study had underlined that states’ reverting to OPS would be a major step backwards and can increase their fiscal stress to unsustainable levels in the medium to long-term. In fact, the states’ expenditure on pensions has grown 184% to Rs 5.2 lakh crore in FY24 from Rs 1.8 lakh crore in FY15. The report underlined that the OPS burden remains above three times the NPS burden even after varying the salary growth rate. This is still a section of central government employees hoping that some of the benefits under OPS would be incorporated by the UPS.
l Pension models abroad
THERE IS A distinct shift towards defined contribution plans from defined benefit plans to reduce the pension burden of the governments. China introduced defined contribution in 2015 to cover around 40 million employees working in the government and public institutions. The government contributes 20% and the employee 8% of the salary. Before that, public pensions were funded on a pay-as-you-go basis from the current operating budgets of government agencies and public institutions. Poland, Denmark, Hungary and Mexico have introduced defined contribution plans.
The central government employees of Thailand are covered under a defined contribution plan in which the employee contributes 3% of the salary and the government matches it. Several countries have also taken measures like cutting benefits, hiking contribution rates, as well as raising the retirement age in order to restore the long-term solvency of public pension systems. Some states in the US have also enacted extended vesting periods, and increased age and service requirements.