Old Pension Scheme comeback: Centre says states can decide OPS restoration; what it means for govt employees

In a written reply in the Lok Sabha on August 10, 2026, Minister of State for Finance Pankaj Chaudhary said the restoration of OPS in the states was a matter of state policy. At the same time, he pointed to the fiscal implications highlighted by the Comptroller and Auditor General (CAG) in its recent State Finance Audit Reports.

The government also made it clear that there is no move indicated in the reply to return to the earlier pension system for Central Government employees covered under NPS.

Instead, the Centre has pointed to the Unified Pension Scheme (UPS), which came into effect from April 1, 2025 as an option under NPS. The government said UPS was introduced to improve pension benefits and provide an inflation-linked defined benefit with a minimum assured payout of Rs 10,000 per month, subject to the scheme’s conditions.

The latest government response is important for employees who continue to demand restoration of OPS, particularly because OPS and NPS work very differently. One gives a defined pension funded from the government budget, while the other is based on contributions and the accumulated retirement corpus. UPS sits somewhere between the two, offering an assured payout while retaining a contributory and fund-based structure.

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Why has the government rejected the return to OPS?

The Centre’s main argument is fiscal sustainability.

Under OPS, pension is a defined benefit. The employee does not have to build a retirement corpus through market-linked contributions to determine the pension payable after retirement. The government bears the responsibility of paying the pension.

The government has therefore argued that bringing back OPS would create a large and continuing liability for the exchequer.

In its Lok Sabha reply, the Finance Ministry said, “The Government had moved away from Old Pension Scheme (OPS) due to its unsustainable fiscal liability on the Government exchequer.”

This is also why the Centre has not treated OPS restoration as a solution to the concerns raised by employees about NPS.

The issue, however, is more complicated at the state level.

Some states have decided to go back to OPS or announced moves in that direction. The Centre’s latest response makes it clear that states have the discretion to take such decisions for their employees. But it also draws attention to the financial burden that such a move can create.

The CAG has highlighted the fiscal implications of reverting to OPS in its State Finance Audit Reports, according to the Finance Ministry.

OPS vs NPS: What is the basic difference?

The biggest difference between OPS and NPS is how retirement income is determined.

Under the old system, the pension was a defined benefit. The pension was linked to the employee’s salary and qualifying service and was funded by the government.

The Centre discontinued OPS for new recruits from January 1, 2004 and introduced NPS for Central Government employees, except the armed forces, joining service from that date.

NPS is a defined contribution system. Both the employee and government contribute to the pension account and the money is invested. The retirement benefit therefore depends on the accumulated corpus and the annuity or payout chosen at retirement.

The government has described this shift as necessary to make the pension system more financially sustainable.

A May 2026 government backgrounder on India’s pension system said the move from defined-benefit pensions to contributory arrangements was aimed at “financial sustainability, shared responsibility and long-term retirement security.”

This is also the key reason why NPS and OPS can feel very different to an employee.

Under OPS, the employee is primarily concerned about the pension formula and qualifying service.

Under NPS, the size of the retirement corpus, investment returns, annuity choices and retirement rules become important.

Why are employees unhappy with NPS?

The main concern raised by employees is uncertainty over the pension they will finally receive after retirement.

NPS does not promise a fixed pension based on the employee’s final salary. The corpus grows through contributions and investment returns, and the retirement income depends partly on the accumulated amount and the payout or annuity structure.

This means two employees with similar salaries and service periods can potentially end up with different retirement outcomes depending on their contributions, investment performance and other factors.

Employee organisations have also raised concerns about market-related risks and the level of pension that can ultimately be generated from the corpus.

The Lok Sabha question specifically referred to “structural infirmities, market risks, and annuity deficits” identified by employee federations.

The government, however, did not accept this as a reason to bring back OPS. Instead, it pointed to the reforms made through UPS.

What is UPS and why was it introduced?

The Unified Pension Scheme was introduced as an option under NPS from April 1, 2025.

It was designed to address one of the biggest concerns around NPS: uncertainty over the post-retirement income.

Under UPS, an employee with at least 25 years of qualifying service is eligible for an assured payout equal to 50% of the average basic pay drawn during the last 12 months before retirement, subject to the scheme’s conditions.

For employees with between 10 and 25 years of qualifying service, the assured payout is proportionate to the period of service.

There is also a minimum assured payout of Rs 10,000 per month after at least 10 years of qualifying service.

The UPS also provides inflation indexation through Dearness Relief. The government has said the assured pension, family pension and minimum assured pension are linked to inflation.

This makes UPS different from the pure defined-contribution structure of NPS.

UPS is not the same as OPS

Despite the assured pension, UPS should not be confused with the old pension system.

UPS remains a contributory and fund-based system. Both the employee and the Central Government make contributions, and the scheme relies on the accumulation and investment of these contributions.

A government backgrounder released in May 2026 said that under UPS, the government contributes 10% of basic pay plus Dearness Allowance to the individual pension fund and an additional 8.5% to a pool corpus. Under NPS, the government contribution to the individual NPS account is 14%.

The government has therefore positioned UPS as a middle path. It retains the contributory structure of NPS but provides greater certainty about retirement income.

The Centre’s latest Lok Sabha response also described UPS as a “fund-based payout system” that depends on regular and timely contributions from both the employee and the government.

How much pension can an employee get under UPS?

The 50% assured payout under UPS applies to an employee who completes at least 25 years of qualifying service.

For example, if the average basic pay during the last 12 months before retirement is Rs 80,000, the basic assured payout under the formula would be Rs 40,000 per month, subject to the applicable UPS conditions.

The benefit is not simply based on the last month’s salary. The calculation uses the average basic pay drawn during the last 12 months before superannuation.

For service between 10 and 25 years, the payout is proportionate.

UPS also provides a family payout. After the death of the employee, the legally wedded spouse is entitled to 60% of the employee’s assured payout, subject to the rules.

The scheme also provides an assured minimum payout of Rs 10,000 a month for eligible employees who have completed at least 10 years of qualifying service.

UPS also provides a lump sum at retirement

The UPS benefit is not limited to the monthly pension.

At retirement, the employee is also entitled to a lump sum payment in addition to gratuity.

The amount is calculated at one-tenth of monthly emoluments, including basic pay and Dearness Allowance, for every completed six months of qualifying service.

Importantly, this lump sum does not reduce the assured pension, according to the government’s description of the scheme.

What is the latest status of UPS?

UPS became operational from April 1, 2025. The government subsequently notified the Central Civil Services (Implementation of the Unified Pension Scheme under the National Pension System) Rules, 2025.

The rules cover matters including enrolment, contributions, retirement benefits, death and disability benefits, voluntary retirement and the consequences of resignation or disciplinary action.

The government has also introduced a one-time switch facility from UPS to NPS for eligible employees, subject to conditions.

An employee opting for UPS can switch to NPS only once and cannot return to UPS after making the switch. The switch has to be exercised at least one year before superannuation or three months before voluntary retirement, as applicable.

This is important because UPS is not simply a permanent replacement for NPS. It is an option within the NPS framework for eligible Central Government employees.

Government’s latest reply on UPS

The latest Lok Sabha response gives the Centre’s position on the broader pension debate quite clearly.

The government has not agreed to restore OPS. Instead, it has pointed to UPS as the reform already introduced to address concerns around the NPS.

The Finance Ministry said the NPS modification committee was constituted under the chairmanship of the then Finance Secretary after concerns were raised about the pension benefits available to Central Government employees.

“With a view of improving upon the pensionary benefits” for such employees, the committee held discussions with stakeholders and suggested measures to modify NPS, the government said.

The outcome was UPS.

The government now says the scheme is designed to provide inflation-linked defined benefits and a minimum assured payout while retaining the fund-based structure.

NPS corpus of Central Government employees reaches Rs 3.65 lakh crore

The size of the pension system has also grown significantly.

According to the latest Lok Sabha reply, the total assets under management under NPS for Central Government employees stood at Rs 3.65 lakh crore as on July 26, 2026.

This is the accumulated value of the pension assets managed under NPS for Central Government employees.

The figure also shows the scale of the system that would have to be dealt with if there were any major change in the pension structure.

At the broader level, the government said in May 2026 that total NPS assets under management had reached around Rs 15.95 lakh crore as of March 31, 2026, covering the wider NPS ecosystem and not just Central Government employees.

What happens to the accumulated NPS corpus if OPS is restored?

This is another important part of the latest Parliament response.

The question specifically asked whether the government had considered returning the accumulated corpus to states in the event of OPS restoration.

The government’s reply did not announce any such mechanism.

Instead, the response focused on the fact that OPS restoration in states is a matter of state policy and highlighted the fiscal implications of such a move.

For employees and states, this distinction matters. The accumulated NPS corpus is not the same thing as a government-funded OPS pension liability. NPS works through individual pension accounts and accumulated investments, whereas OPS is a defined-benefit system funded through the government’s budgetary resources.

Therefore, a decision by a state to return to OPS does not simply mean that the existing NPS system can be reversed without financial consequences.

What happens to employees under NPS now?

For Central Government employees who remain under NPS, the existing contributory system continues.

The employee and government contribute to the pension account, the money is invested and the final retirement benefit depends on the accumulated corpus and applicable exit and annuity rules.

For eligible employees who opted for UPS, the retirement benefit is instead linked to the assured payout framework, subject to qualifying service, salary and other scheme conditions.

This means Central Government employees covered under the post-2004 pension system now effectively have two different pathways within the broader NPS framework: NPS itself and UPS as the assured-payout option.

OPS vs NPS vs UPS: What is the difference?

At a basic level, the three systems can be understood this way:

OPS: Defined benefit. Pension is linked to salary and qualifying service and is funded by the government.

NPS: Defined contribution. The employee and government contribute and the retirement benefit depends on the accumulated corpus, investment returns and payout or annuity structure.

UPS: Contributory but with an assured payout. It offers a defined benefit subject to conditions while continuing to rely on contributions and a fund-based structure.

This difference is at the heart of the pension debate.

Employees seeking OPS are looking for certainty in retirement income. The government, meanwhile, is concerned about the open-ended fiscal burden that comes with a defined-benefit pension system.

UPS is the Centre’s attempt to address the first concern without completely returning to the second model.

What does the latest government position mean?

For now, the Centre’s position is clear.

There is no indication of a return to OPS for Central Government employees covered under NPS in the latest Lok Sabha response. The government continues to argue that OPS creates an unsustainable fiscal liability.

At the state level, the decision remains with individual state governments. But the Centre has highlighted the fiscal consequences of such a move.

For Central Government employees, the government’s focus is now firmly on UPS as the alternative to the market-linked uncertainty of NPS.

The pension debate, therefore, is no longer simply about OPS versus NPS. It is increasingly about whether UPS can provide employees the certainty they seek while keeping the pension system financially sustainable for the government.

For employees planning their retirement, the key difference is simple: OPS offers a government-funded defined pension, NPS builds a retirement corpus through contributions and investments, while UPS tries to combine contributions with an assured and inflation-linked payout.