Unified Pension Scheme

General Studies Paper-3

Context: Recently, the Union Cabinet, chaired by the Prime Minister, approved the Unified Pension Scheme (UPS) by replacing the National Pension System (NPS).

About

• It is based on the recommendations of T. V. Somanathan Committee (2023), will be effective from April 1, 2025.
• The UPS proposes to amalgamate advantages of both Old Pension Scheme (OPS) and New Pension Scheme (NPS).
• It represents a forward-looking approach to retirement planning in India, aiming to provide a secure and sustainable pension system for all eligible employees.
• It aims to provide long-term financial security to government employees while maintaining flexibility and choice.

Key Features of the Unified Pension Scheme (UPS)

• Guaranteed Pension: Under the UPS, eligible employees are assured a pension equal to 50% of their average basic pay drawn over the last 12 months prior to superannuation.
  • For service periods between 10 and 25 years, the pension will be proportional.
• Minimum Qualifying Service: Employees with a minimum qualifying service of 25 years will receive the full assured pension.
  • In case of an employee’s demise, their family will receive an assured pension equal to 60% of the employee’s pension before their demise.
• Assured Minimum Pension: Upon superannuation after a minimum of 10 years of service, employees will receive an assured minimum pension of Rs 10,000 per month. It ensures a safety net for retirees.
  • The UPS promises central government employees who have completed at least 25 years of service a guaranteed pension.
  • It is calculated as half of their average basic salary over the 12 months preceding superannuation.
• Inflation Indexation: The UPS applies inflation indexation to the assured pension, assured family pension, and assured minimum pension.
  • In the form of Dearness Relief based on All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to service employees.
• Lump Sum Payment: In addition to gratuity, 1/10th of monthly salary+ Dearness Allowance for every completed six months of service.
• Financial Contributions: Employees choosing the UPS will continue to contribute 10% of their salary.
  • The government’s contribution will increase from 14% to 18.5%.
  • It ensures that employees do not face any additional financial burden.

Choice Between UPS and NPS

Central government employees have the option to choose between the UPS and the National Pension Scheme (NPS).

Unlike the UPS, the NPS is market-linked.

Similarities to the Old Pension Scheme (OPS)

• The UPS shares similarities with the old pension scheme in terms of benefits. However, it differs significantly in its funding mechanism.
• Unlike the OPS, which was a pay-as-you-go program, the UPS is fully funded each year from the budget and absorbed into it. This approach prevents future generations from bearing the burden of pension payments.

Choice for NPS Subscribers

• Employees currently under the National Pension System (NPS) have the option to shift to the UPS.
• NPS, introduced in 2004, is a defined contribution scheme where employees accumulate a retirement corpus based on their contributions.
• UPS provides an alternative for those seeking a more assured pension.