Context: The Finance Ministry has introduced a one-time, one-way switch facility from the Unified Pension Scheme (UPS) to the National Pension System (NPS).
From 1 April 2025, the government introduced the UPS as an option under the NPS for Central government employees. UPS will provide assured payouts to the employees.
Relevance of the Topic: Prelims: Key facts about the Unified Pension Scheme (UPS).
Key Features of the Unified Pension Scheme
- Assured pension: 50% of the employee’s average basic pay drawn over the last 12 months before superannuation for a minimum qualifying service of 25 years.
- Assured minimum pension: In the case of superannuation after a minimum 10 years of service, the UPS provides for an assured minimum pension of Rs 10,000 per month.
- Assured family pension: Upon a retiree’s death, their immediate family would be eligible for 60% of the pension last drawn by the retiree.
- Inflation Indexation: Pension amounts are adjusted for inflation using the All India Consumer Price Index for Industrial Workers (Dearness Relief).
- Lumpsum payment at superannuation: Subscribers receive a lump sum payment upon retirement, supplementing their regular pension.
- Contributory Scheme: Similar to the National Pension System (NPS), the scheme is funded by contributions from:
- Employees: 10% of their basic pay plus Dearness Allowance (DA).
- Government: 18.5%.
Eligibility Criteria:
The UPS is applicable to the following categories of Central Government employees:
- Existing employees: Those in service as of April 1, 2025, and currently covered under NPS.
- New recruits: Individuals joining Central Government services on or after April 1, 2025.
- Retired employees: Employees who were under NPS and have superannuated, voluntarily retired, or retired under Fundamental Rules 56(j) on or before March 31, 2025.
- In cases where the subscriber has passed away prior to opting for UPS, the legally wedded spouse is eligible.
Implementation Timeline:
- The regulations for the operationalisation of UPS come into effect from April 1, 2025.
National Pension Scheme:
- NPS was a market-linked contribution scheme introduced by the Central Government. NPS replaced the Old Pension Scheme on 1st January, 2004.
- The Pension Fund Regulatory and Development Authority (PFRDA) regulates and administers NPS under the PFRDA Act, 2013.
Need for NPS:
- OPS had a fundamental problem, i.e. it was unfunded, there was no corpus specifically for pension.
- Over time, this led to the government’s pension liability to balloon to fiscally unhealthy levels. The pension liabilities of the Centre jumped from Rs 3,272 in 1990-91 to Rs 1,90,886 crore in 2020-21.
Working of NPS:
- The NPS was different from OPS in two fundamental ways.
- It did away with an assured pension.
- It would be funded by the employee himself/ herself, along with a matching contribution by the government.
- The defined contribution comprised 10% of the basic pay and dearness allowance by the employee, and the government’s contribution of 14%.
- Individuals under NPS can choose from a range of schemes and pension fund managers as well as private companies to invest their money contributed to NPS.
Opposition to NPS:
- Under the NPS, government employees received lower guaranteed returns and had to contribute to their pension, unlike the OPS where there were no employee contributions and higher guaranteed returns.
- Amid ongoing calls for a return to the OPS, the union government established a committee in 2023 led by T V Somanathan. The recommendations of the committee have led to the introduction of the new Unified Pension Scheme (UPS).
Comparing various Pension Schemes
| Feature | Unified Pension Scheme (UPS) | New Pension Scheme (NPS) | Old Pension Scheme (OPS) |
| Type of Scheme | Hybrid (Assured pension + contribution-based) | Contribution-based | Defined benefit (assured pension) |
| Applicability | Central govt. employees; State government has option to adopt | Central and state government employees (except armed forces) | Central and state government employees before April 1, 2004. |
| Pension Guarantee | Minimum pension guaranteed | No assured pension; depends on market returns | 50% of last drawn salary as pension guaranteed |
| Employee Contribution | 10% of salary; govt. contributes 18.5%. | 10% of salary; 14% by the government for central employees. | No contribution from employees (fully funded by govt) |
| Inflation Adjustment | Yes (dearness relief linked to inflation index) | No guaranteed inflation adjustment | Yes (DA revisions based on inflation) |
| Withdrawal Options | Lumpsum + monthly pension | 60% lumpsum, 40% annuity | No lumpsum withdrawal, only pension |
| Family Pension | 60% of pension amount to dependents | Not guaranteed but depends on chosen annuity plan | 50% of pension amount given as family pension |