Central government employees and unions associated with them have long been demanding that the Centre bring back the Old Pension Scheme (OPS), which was replaced in January 2004 with the National Pension System (NPS). One of the key arguments these central employees and unions have been making is that the OPS gave them the minimum and assured pension guarantee, which was missing under the NPS. Given this, the Centre tried to find a middle ground through the Unified Pension Scheme (UPS), blending some of the key features from both pension schemes – OPS and NPS. Like OPS, UPS guarantees an assured pension for employees on retirement.
The Centre announced the UPS last August and has issued detailed operational guidelines recently about the programme’s framework, timeline, and implementation. The scheme, to be launched on April 1, aims to address the key concern raised by government employees regarding the NPS, and that is an assured pension for employees.
Recently, many questions related to UPS were raised in Parliament, including its impact on existing NPS subscribers.
One member of parliament, Dharmendra Yadav, asked the government to inform the House about the timeline for full implementation of UPS and the manner in which it is likely to impact the existing NPS subscribers. He also sought to know about the long-term financial viability of the UPS against the NPS. The member also raised a query about the difference between investment flexibility in NPS and UPS.
Also read: UPS: Not all government employees will get gratuity benefit of Rs 25 lakh – Know why
Now, let us know about the government’s stand on these matters and also understand important things related to the UPS.
In response to above questions, Minister of State for Finance Pankaj Chaudhary said that UPS has been notified by the government as an option under NPS with the objective of providing assured monthly payout after retirement to the central government employees covered under the NPS. “The UPS has been envisaged to address the demand of the employees covered under NPS regarding assured pension after retirement, while ensuring a fiscally responsible funded and contributory pension scheme.”
Talking about the UPS financial viability, the minister said that UPS is defined contribution scheme with elements of defined benefit. It relies on the regular and timely accumulation and investment of applicable contributions (from both the employee and the employer) for assured payout to the employees, he said.
The monthly contribution of the UPS subscriber shall be 10% of the basic pay and dearness allowance matched by the central government by crediting an equal amount to the individual PRAN of the UPS subscriber.
The central government, Chaudhary said, shall also make an additional contribution at an estimated eight and half percent of basic pay plus dearness allowance of all employees who opt the UPS, to the pool corpus on aggregate basis. The additional contribution is for supporting assured payouts under the Unified Pension Scheme to ensure long-term financial viability of UPS, he added.
“Presently, central government subscribers are allowed to choose any of the pension funds registered with PFRDA and exercise investment options from (a) 100% investments in Government securities; (b) Conservative Life Cycle fund with maximum equity exposure capped to 25%; (c) Moderate Life Cycle fund with maximum equity exposure capped to 50%; and (d) Default scheme,” the minister replied to the query about the difference between investment flexibility in NPS and UPS.
Also read: Unified Pension Scheme from April 1: Who qualifies for 50% guaranteed pension?
The member also sought to know whether the government has identified the problems of NPS and if so, the details thereof. He also asked the government whether the UPS will resolve the problems that employees generally associate with the NPS.
To this, the government response was NPS is a defined contribution-based scheme with market linked returns for post-retirement benefits. An NPS review committee was constituted to suggest measures as are appropriate to modify the NPS with a view of improving upon the pensionary benefits of government employees covered under NPS, keeping in view the fiscal implications and impact on overall budgetary space, so that fiscal prudence is maintained to protect the common citizens, Chaudhary informed.
UPS is a defined contribution-based schemes with elements of defined benefit which addresses the concerns regarding assured payout after retirement, he added.
What will be the impact of UPS on NPS subscribers?
Government employees who are already enrolled in NPS can switch to UPS if they wish.
What will change in UPS?
Pension in NPS is completely market-linked, that is, pension is decided based on the return on investment.
In UPS, the government has made a provision for assured pension, which will increase pension security after retirement.
However, it is also important for the government to keep the pension system financially sustainable.
UPS vs NPS: Which is better financially?
Even though both UPS and NPS are contribution-based schemes, UPS will also get additional contribution from the government.
Under UPS:
Employees will contribute 10% of their basic salary and dearness allowance (DA).
The government will also contribute 10%.
In addition, the government will contribute an additional 8.5% for UPS customers to a pooled corpus fund to provide an assured pension.
Under NPS:
Both employees and the government contribute 10% each, but it offers market-linked returns, there is no assured pension.
What will be the investment options in UPS and NPS?
Investment options in NPS:
The entire amount can be invested in government bonds.
Conservative Life Cycle Fund (maximum 25% equity investment)
Moderate Life Cycle Fund (maximum 50% equity investment)
Default scheme
Investment options in UPS:
Employees can choose investment options only on their corpus amount.
The additional contribution given by the government will go into a pooled corpus, which will be controlled by the central government.
Also read: Unified Pension Scheme roll-out from April 1: How it differs from NPS and old pension scheme
Will UPS be able to solve the problems of NPS?
The biggest problem with NPS was that it had a non-assured pension, that is, how much pension would be received after retirement, it was completely dependent on the performance of the market.
UPS has a provision for assured monthly pension, which tries to address this concern of the employees.
An additional 8.5% contribution will be given by the government to ensure that the pension fund remains financially strong in the long term.
However, how effective UPS will be will be clear only after its implementation.
Final thoughts
With the advent of UPS, government employees can get a better alternative to NPS, in which pension will be guaranteed after retirement. But its long-term success will depend on how the government implements it and how the fund is managed.
