On Saturday, the Union Cabinet approved a Unified Pension Scheme (UPS) which takes a middle path between the Old Pension Scheme (OPS) and the National Pension Scheme (NPS) that came into effect in 2004. Mint looks at the pros and cons of all three:
What is the Unified Pension Scheme?
It is a new hybrid pension scheme for government employees that, like OPS, guarantees an assured monthly pension of 50% of their last drawn salary before superannuation while retaining the contributory element of the NPS. The employee contributes 10% of their salary while the government puts in 18.5%. It factors in inflation through dearness allowance hikes. It includes a family pension and guarantees a lump sum, apart from gratuity, at retirement. Employees with 10 years of experience will get ₹10,000 per month as assured pension. It takes effect on 1 April 2025.
What’s the difference with NPS?
NPS was unpopular as the quantum of monthly pension was not guaranteed. It depended entirely on the returns the fund managers—regulated by the Pension Fund Regulatory and Development Authority—make from investing the employees’ and the government’s contributions in equity and other market-linked securities. As the returns were low, pensions under NPS were lower than what OPS offered. Also, NPS did not account for the dearness allowance hike in line with inflation. When NPS came into effect in April 2004, 27 states joined, but five of them have reverted to OPS in recent years.
Why did OPS have to be reformed?
OPS was an unfunded pension scheme and was entirely paid for by the government. As India aged and more government employees retired, the expense became unsustainable for many states, weakening them financially and increasing their debt. Studies put OPS’ fiscal burden at 4.5 times NPS’. It took more than a decade to build bipartisan consensus and implement NPS.
Will UPS stop the shift to the old scheme?
It should as NPS’ major pain points have been addressed. This will ensure that the pension from OPS is not very different from that of UPS. Resentment against NPS rose as the quantum of pension that it gave was much lower than what pensioners got under OPS. Employees under NPS feared that if markets turn adverse, they may not get any pension at all. Over time, political parties began promising a return to OPS to win elections. To be sure, pension is a state subject and the Centre’s UPS is just a recommendation.
Will UPS increase the Centre’s fiscal burden?
The cost will be higher than NPS but far lower than OPS. The new scheme, the Centre says, “balances employees’ aspiration with fiscal prudence.” Compared to NPS, the Centre’s contribution has increased from 14% to 18.5% of an employee’s salary. It will further increase or decrease depending on periodic actuarial assessments. If returns from investing employees’ corpus are less, the Centre has to provide funds so the assured pension is paid. UPS is a setback to pension reforms as envisaged but is proffered as a middle path.