In a significant move to address the longstanding concerns of government employees, the Indian Cabinet, led by prime minister (PM) Narendra Modi, has approved the implementation of a new Unified Pension Scheme (UPS). This move, announced ahead of assembly elections in one state and a Union Territory this year, addresses the longstanding demands of government employees who have expressed dissatisfaction with the National Pension Scheme (NPS) introduced in 2004.
The timing of this announcement suggests that it may have political implications, potentially aimed at garnering support from government employees and their families in the upcoming elections. This underscores the political sensitivity surrounding pension reforms and their potential impact on voter sentiment.
This groundbreaking decision, announced by information and broadcasting minister Ashwini Vaishnaw, marks a pivotal shift in the pension landscape for central government workers. The UPS, set to take effect from 1 April 2025, is poised to benefit approximately 2.3mn (million) Central government employees. In a show of federal flexibility, state governments will also have the option to adopt this scheme, potentially expanding the beneficiary pool to around 90 lakh employees nationwide. The financial implications of this reform are substantial, with the government estimating an expenditure of Rs800 crore for arrears and an annual cost increase of about Rs6,250 crore in the first year.
The scheme guarantees a pension amounting to 50% of the average basic pay drawn over the last 12 months before retirement, provided the employee has completed a minimum of 25 years of service. For those with shorter tenures, a proportionate benefit is available, with a minimum service requirement of 10 years. The UPS also ensures family welfare, offering an assured family pension at 60% of the employee's pension immediately before their demise.
To safeguard against inflation, the UPS incorporates an indexation mechanism based on the All India Consumer Price Index for Industrial Workers (AICPI-W), similar to the system in place for serving employees. This feature ensures that pensioners' benefits remain relevant in the face of rising costs. Additionally, the scheme provides for a lump-sum payment at superannuation, complementing the existing gratuity benefits without reducing the quantum of assured pension. 1/10th of monthly emolument (pay + DA) as on the date of superannuation for every completed six months of service. This payment will not reduce the quantum of assured pension.
The introduction of the UPS comes in response to growing demands from government employees for modifications to the existing National Pension Scheme (NPS). PM Modi's administration formed a committee, headed by cabinet secretary TV Somanathan, to conduct an extensive review of pension systems. This committee engaged in over 100 meetings with various organisations and consulted stakeholders including the Reserve Bank of India and the World Bank to ensure a comprehensive approach.
A key feature of the UPS is its optionality. Central government employees will have the choice to select either the NPS or the UPS. This flexibility extends to existing NPS subscribers, who will be given the opportunity to switch to the UPS if they so desire. Government officials have indicated that for most central government employees, opting for the UPS is likely to be more beneficial than remaining with the NPS.
The UPS represents a significant departure from the NPS which was introduced for government employees who began their service on or after 1 April 2004. Unlike the NPS, which is based on a contribution model, the UPS marks a return to a defined benefit scheme, reminiscent of the pension system available to employees hired before 2004.
This reform comes against the backdrop of several non-BJP states reverting to the defined benefit-linked Old Pension Scheme (OPS) and demands from employee organisations in other states for similar measures. While the OPS provided retirees with a pension equal to 50% of their last drawn salary, its non-contributory nature raised concerns about long-term fiscal sustainability.
The UPS aims to strike a balance between employee welfare and fiscal responsibility. Under this scheme, employees will continue to contribute 10% of their salary, while the government's contribution will increase from 14% to 18.5%. This structure is designed to ensure the scheme's long-term viability while providing enhanced benefits to employees.
The UPS bears striking similarities to the Old Pension Scheme (OPS), which many employees have been advocating for. Like the OPS, the UPS offers a defined benefit structure, providing employees with a guaranteed pension amount rather than relying solely on market-linked returns. The assured pension of 50% of the average basic pay of the last 12 months of service (for those with 25 years of service) closely mirrors the OPS formula.
Furthermore, the UPS incorporates inflation protection through dearness relief, a feature reminiscent of the OPS. It also ensures family pension benefits, another hallmark of the older system. These features collectively make the UPS more akin to the OPS than the NPS in terms of benefit structure and employee security.
However, this return to a defined benefit system comes with potential fiscal challenges. As the government's liability to pay pensions will no longer be limited to the corpus built by employee contributions, it may face increased financial pressure in the long term. The scheme's sustainability will depend on careful financial planning and management by the government.
While the UPS addresses employee concerns and provides enhanced retirement security, it also reintroduces the fiscal challenges that led to the adoption of the NPS in the first place.
