Syllabus: GS: III:  Indian Economy

Why in the News?

• The Government of India has announced the launch of the Unified Pension Scheme (UPS), effective from April 1, 2025.

More About the News

• Employees currently under the National Pension Scheme (NPS) will be eligible to opt for the new scheme.
• The government has allowed employees time till September 30, 2025, to exercise their choice of joining UPS.
• While the NPS was mandatory for all central government employees joining service from 1 January 2004, the UPS is optional.

Objectives of UPS

• To balance fiscal prudence with the need for employee welfare.
• To provide a hybrid model that combines the assured benefits of the Old Pension Scheme (OPS) with the contributory and market-linked features of NPS.
• To address employee concerns regarding the lack of guaranteed pensions under NPS while avoiding the fiscal risks of OPS.

Key Features of Unified Pension Scheme

• Assured Pension
  • Provides 50% of the average basic pay drawn over the last 12 months before retirement for employees with a minimum 25 years of service.
  • For those with 10–25 years of service, pension is proportionately reduced.
    
• Minimum Assured Pension
  • Employees retiring after at least 10 years of service will get a minimum of ₹10,000 per month.
• Family Pension
  • Upon the retiree’s death, the immediate family receives 60% of the pension last drawn.
• Inflation Indexation
  • Dearness Relief (DR) will be linked to the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to serving employees.
• Investment Options
  • The pension corpus will be split into:
    • Individual Fund – Employees can decide investment choices.
    • Pooled Fund – Government contributes an additional 8%, invested as per PFRDA’s default pattern.
• Withdrawal Flexibility
  • Employees may withdraw up to 60% of their individual corpus, though this reduces the assured pension proportionately.
• Additional Benefits
  • At retirement, employees receive a lump sum equal to 1/10th of monthly salary plus DA for every six months of service, in addition to gratuity.
    

Coverage and Applicability

• Applicable to Central Government employees under NPS (since 2004).
• NPS retirees will also benefit, with arrears adjusted against earlier withdrawals.
• While the scheme is currently for central employees, state governments may adopt it.
• Likely to benefit 23 lakh central government employees.

Comparative Overview: UPS vs NPS vs OPS

Historical Context: Pension Reforms in India

• Old Pension Scheme (OPS)
  • Provided unfunded assured pensions (50% of last drawn salary).
  • Caused rising fiscal liabilities due to increasing life expectancy.
  • Pension liabilities ballooned:
    • Centre’s bill: From ₹3,272 crore (1990–91) to ₹1.9 lakh crore (2020–21).
    • States’ bill: From ₹3,131 crore (1990–91) to ₹3.86 lakh crore (2020–21).
• National Pension Scheme (NPS) (introduced 2004)
  • Shifted to a contributory, market-linked system.
  • Lower returns for employees, with no guaranteed pension.
  • Criticized for employee insecurity compared to OPS.

Significance of UPS

• Provides assured pension, minimum pension, family pension, and inflation indexation — features reminiscent of OPS.
• Maintains a contributory, funded model like NPS, ensuring fiscal discipline.
• Balances employee welfare with the government’s fiscal sustainability.
• Addresses long-standing concerns of government employees by giving security while retaining market-linked growth potential.

Conclusion

The Unified Pension Scheme (UPS) represents a middle path between the unfunded generosity of OPS and the market-linked insecurity of NPS. By ensuring a 50% assured pension, inflation protection, and family support, while retaining contributory funding and investment flexibility, UPS is a pragmatic reform. It provides stability to employees while safeguarding India’s long-term fiscal health.

Question
Explain the rationale behind the Unified Pension Scheme (UPS). How is it different from earlier pension schemes of India? (250 words/15 marks)