The Unified Pension Scheme: A Comprehensive Overview

Unified Pension Scheme: Features and Implications

1. Why did the Centre introduce the Unified Pension Scheme (UPS)?

The Unified Pension Scheme (UPS) was introduced to address the concerns raised by government employees regarding the National Pension System (NPS). The NPS, implemented in 2004, replaced the Old Pension Scheme (OPS) but faced criticism for not guaranteeing a stable pension income, unlike the OPS. With increasing discontent among employees, particularly those nearing retirement under the NPS, the government felt the need to revise the pension system to balance employee expectations with fiscal sustainability.

2. What are the main features of the Unified Pension Scheme?

• Guaranteed Pension: Government employees will receive a pension amounting to 50% of their average basic pay over the last 12 months of service, provided they have completed a minimum of 25 years of service. Employees with less service time will receive proportionately lower pensions, with a minimum of ₹10,000 per month for those with at least 10 years of service.
• Family Pension: In case of the employee's death, their dependents will receive 60% of the pension amount.
• Inflation Adjustment: Pensions under the UPS will be adjusted in line with consumer price trends, similar to the dearness allowance for current employees.
• Lumpsum Superannuation Payout: In addition to gratuity benefits, a lumpsum payout equivalent to 1/10th of the employee’s monthly salary for every six months of service will be provided upon retirement.
• Government Contribution: Employees will contribute 10% of their salary to the pension fund, while the government will contribute 18.5%, with the possibility of future adjustments.

3. How is the Unified Pension Scheme different from the current system?

• Old Pension Scheme (OPS): The OPS guaranteed a pension of 50% of the last drawn salary, with dearness allowance adjustments and additional benefits for those over 80 years old. It was fully funded by the government, with no contributions from employees.
• Unified Pension Scheme (UPS): The UPS combines features of both the OPS and NPS. It offers the security of a defined pension benefit like the OPS while maintaining the contributory aspect of the NPS. The government will cover any shortfall between the fund’s earnings and the guaranteed pension amount.

4. Why did the government opt for a change?

The NPS faced significant pushback due to its lack of guaranteed pension benefits, especially as employees started retiring with lower-than-expected pensions. This dissatisfaction became a political issue, with some opposition-led states reverting to the OPS. The UPS was introduced as a compromise, offering more security while attempting to remain fiscally responsible.

5. How have government employees responded to the Unified Pension Scheme?

Government employees have generally welcomed the UPS as it addresses some of the key issues with the NPS. However, there are concerns about the contributory nature of the scheme and the absence of certain features from the OPS, such as the option to commute a portion of the pension into a lumpsum payment.

6. What will be the cost to the exchequer?

The initial cost of implementing the UPS, including contributions and arrears, is estimated at an additional ₹7,050 crore for the current year. Future costs will increase with dearness allowance hikes and higher pension payouts, which will need to be factored into the government's fiscal plans. However, economists believe that these costs can be managed with strong revenue growth, similar to how Pay Commission revisions have been absorbed in the past.

This explanation covers the reasons for the introduction of the Unified Pension Scheme, its features, differences from the previous systems, and its implications for both employees and the government.