UNIFIED PENSION SCHEME (UPS)
1. Context
Union Cabinet signed off on a major shift in the approach to provide old age income security to Central government employees, with 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 scheme, while employees who are part of an ongoing pension scheme called the National Pension System will have the option to switch to the UPS. States can also bring their employees under the UPS but will need to work out funding from their own resources
2. What is the Unified Pension Scheme (UPS)?
The Unified Pension Scheme (UPS) refers to a pension initiative proposed to streamline and unify various pension systems in India, aiming to provide a more consistent and efficient framework for pension benefits across different sectors. It is a part of broader reforms aimed at improving the sustainability and accessibility of pension systems for both government employees and individuals in the private sector
3. What are the key components of UPS?
- The Unified Pension Scheme (UPS) includes five main components. Firstly, it guarantees that government employees will receive a lifetime monthly pension amounting to half of their average basic salary from the last 12 months of service before retirement, provided they have served a minimum of 25 years.
- For those with less than 25 years of service, the pension benefits will be reduced proportionally, with a minimum pension set at ₹10,000 for those who have worked for at least 10 years.
- In the event of an employee’s death, a family pension, amounting to 60% of the employee's pension, will be provided to their dependents. To protect against inflation, these pension payments will be adjusted based on consumer price trends for industrial workers, similar to the dearness relief given to current government employees.
- Additionally, retirees will receive a lump-sum superannuation payout, along with gratuity benefits. This payout will be calculated as 1/10th of the employee’s monthly salary at the time of retirement for every six months of service
4. What is the difference between old and new pension scheme?
- Government employees who joined before January 1, 2004, were covered under what is known as the Old Pension Scheme (OPS). However, this was replaced by the National Pension System (NPS) for employees who joined on or after that date.
- The OPS guaranteed employees a pension equal to 50% of their last drawn salary, along with increases for dearness allowance.
- It also provided a family pension of 60% of the last drawn pension and a minimum pension of ₹9,000 plus dearness allowance. At the time of retirement, employees could take 40% of their pension as a lump sum.
- Additionally, pensioners who reached the age of 80 received a 20% increase in their monthly pension, with further increases every five years. Pensions were adjusted according to salary revisions recommended by the Pay Commission, with the most recent update implemented in 2016.
- One major distinction between the OPS and both the NPS and the Unified Pension Scheme (UPS) is that OPS benefits were paid directly from the government’s treasury each month, meaning these obligations were "unfunded."
- Unlike private sector employees, whose retirement savings are managed by the Employees’ Provident Fund Organisation, no contributions were made by either employees or employers under the OPS.
- The NPS, introduced by the Atal Bihari Vajpayee government after lengthy discussions about the growing costs of civil servants' pensions, replaced the OPS's 'defined benefits' model with a 'defined contribution' approach.
- Under the NPS, 10% of employees' salaries, matched by contributions from the employer (either the Central or State governments, as nearly all states adopted the NPS), were invested in market-linked securities, including equities, managed by professional fund managers.
- At retirement, employees were required to use 40% of their NPS savings to purchase an annuity that would provide a monthly income. Although the government increased its contribution to the NPS to 14% in 2019, the NPS did not guarantee specific pension amounts, unlike the OPS.
- The Unified Pension Scheme (UPS) aims to blend the defined benefit aspect of the OPS with the defined contribution model of the NPS. Employees will contribute 10% of their salary, while the government will contribute 18.5%, with the possibility of adjusting this rate in the future.
- The government will cover any shortfall between the returns generated by these contributions and its pension obligations.
- It is unclear whether the UPS will include adjustments based on future Pay Commission recommendations or provide higher pensions for those over 80 years of age, as the OPS did
5. Reasons for the Change
- Before and after the introduction of the NPS, government employees expressed strong opposition due to the lack of guaranteed pension incomes and the disparity between the benefits received by employees who joined after 2004 compared to those who joined earlier. This discontent has grown in recent years, as some NPS participants with fewer years of service began retiring with comparatively lower pension benefits.
- This unrest eventually became a political issue, with opposition parties like the Congress pledging to reinstate the OPS for state employees in the lead-up to some state elections and implementing this change after coming to power in a few states.
- The Narendra Modi government, in its second term, opposed this reversal, arguing that it was fiscally irresponsible. However, in March 2023, Finance Minister Nirmala Sitharaman announced the formation of a committee to review the NPS for government employees, aiming to balance "their aspirations with fiscal prudence."
- This committee was led by former Finance Secretary T.V. Somanathan, and while its report has not yet been made public, the decision to introduce the UPS has been influenced by the committee's discussions.
- If there was any doubt about the connection between the UPS benefits and political considerations ahead of several state elections, Information and Broadcasting Minister Ashwini Vaishnaw addressed them.
- While announcing the UPS, he pointed out that Congress-ruled states that had promised to return to the OPS had not yet implemented it, whereas Prime Minister Modi had delivered a solution aimed at ensuring "inter-generational equity."
6. Reaction of States
- Central government employees have generally welcomed the provisions of the UPS, viewing it as recognition of the issues with the NPS. However, there are still concerns about the contributory nature of the UPS and the absence of a commutation option similar to the OPS.
- Like the employee representatives, economists are also awaiting more detailed information about the structure and financial implications of the UPS. This year, the contributions to the UPS, including arrears for some employees, are anticipated to cost an additional ₹7,050 crore.
- Over time, increases in dearness allowance will also require extra funding. Aditi Nayar, chief economist at ICRA, noted, “Guaranteed pensions will increase the government's committed expenditure in the future, while reducing uncertainty for employees. This needs to be factored into the fiscal consolidation plans going forward.”
- Although the immediate effect will be the government's additional 4.5% contribution to the UPS, future pension payouts will be higher but could be managed through increased revenue growth
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For Prelims: PFRDA, NPS, AMC, PF, ISS, SLW
For Mains:
1.What is National Pension System and discuss the new withdrawal rules (250 words)
2.What is SLW and explain its Benefits (250 words)
3.What is PFRDA and Critically analyse the functions and new regulations of PFRDA (250 words)
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Source: The Hindu
