Opinion | Unified Pension Scheme: A Mix Of New And Old

The Modi government's decision to introduce an assured pension for central government employees reflects political pragmatism over strict fiscal calculations. On August 24, the Union Cabinet approved the new Unified Pension Scheme (UPS) for 2.3 million central government employees across India.
The UPS combines elements of both the New Pension Scheme (NPS) and the Old Pension Scheme (OPS).

By introducing the UPS, the central government aims to address the dissatisfaction among employees with the NPS. Following persistent demands to revert to the OPS, Prime Minister Narendra Modi established a committee under the chairmanship of then Finance Secretary (now Cabinet Secretary-designate) TV Somanathan in 2023.

The UPS guarantees a pension of 50% of the basic salary for employees who joined the service after January 1, 2004. Employees opting for the UPS will be eligible for this guaranteed pension after 25 years of service.

The new scheme will take effect on April 1, 2025, with benefits applicable to those retiring by March 31, 2025, including the payment of any arrears. Employees will have the option to choose between the UPS and the NPS starting from the upcoming financial year.

The Trio: UPS-NPS-OPS

The UPS offers a guaranteed 50% pension, dearness relief, family pension, an increased government contribution from 14% to 18.5%, and additional lump-sum payments on retirement. The new scheme will provide a minimum pension of Rs 10,000 per month, which will be adjusted for inflation.

The existing NPS, which requires a 10% contribution from the employee's basic salary with the government contributing 14%, will remain an option. Unlike the OPS, where employees did not contribute, the UPS is a contributory pension scheme.

Introduced by the Atal Bihari Vajpayee government to reform India's pension policies and address fiscal health, the NPS replaced the OPS on January 1, 2004. Rambir Dalal, former PF Commissioner and currently managing partner at Peoplescient Consulting LLP, notes, "A good pension system should ensure adequacy of benefits, be fiscally sustainable, and be transparent for beneficiaries."

Dalal adds, "The UPS meets the demand for a guaranteed pension and mitigates the risks associated with investment and insufficient corpus accumulation in the NPS." He further explains, "It increases pension coverage and flexibility by reducing the minimum service eligibility, allowing government employees to switch careers after 10 years."

Political Compulsions

The Congress party promised a return to the OPS during assembly elections in Himachal Pradesh, Madhya Pradesh, Chhattisgarh, and Rajasthan over the past two years. Congress governments in Himachal Pradesh (2023), Rajasthan (2022), and Chhattisgarh (2022), as well as the AAP government in Punjab (2022), have reinstated the OPS.

Despite Congress's losses in the 2023 Rajasthan and Chhattisgarh assembly elections, the current BJP state governments in both states continue with the OPS.

"It is a victory for the people of India. We should not forget that it was Congress in Rajasthan, followed by Himachal Pradesh and Chhattisgarh, that restored the OPS in response to government employees' demands," says Pranav Jha, AICC Secretary attached to the Congress President's office.
He adds, "The subdued Modi government, following the June 4 drubbing, has been compelled to reconsider its stance."

Interestingly, the OPS was not mentioned in the Congress Lok Sabha manifesto. While the UPS is not identical to the OPS, its benefits for retiring employees are seen as similar.

The new scheme could potentially serve as a template for extending benefits to state governments and public sector employees across the country.

This new scheme may help the government regain the support of government employees, a vocal political constituency. The results of the general election and the challenge from the Opposition in upcoming Assembly elections in Haryana, Maharashtra, and Jharkhand may have also influenced the government's decision to increase spending.

Financial Impact

Pension liabilities for the Centre and states have significantly increased in recent years. In 2023-24, the central and state governments allocated Rs 2.3 lakh crore and Rs 5.2 lakh crore respectively for pensions. It is estimated that around 12% of revenue expenditure in all states and UTs is allocated to pensions, with higher percentages in states with the OPS.

The government asserts that the UPS is fiscally prudent. The expenditure on arrears will be Rs 800 crore in the first year, with an estimated total cost of Rs 6,250 crore. "The UPS remains within the framework of a contributory funded scheme, unlike the OPS, which is unfunded and non-contributory," Somanathan stated.

The major financial impact of the UPS will stem from the increased government contribution - from 14% to 18.5% of the basic and dearness allowance (DA). "While this will create additional short-term financial burdens, the UPS will be more fiscally sustainable than the OPS in the long run. In a growing economy, the availability of long-term pension funds can support the development of physical infrastructure," says Dalal.

The UPS is designed for a relatively small number of government employees, with costs borne by all taxpayers, including those in the private sector who lack job and pension security. It remains to be seen how the government will balance the demands of political economy with these financial considerations.