Article: The cure for pension pain… After OPS and NPS, now UPS

Siddharth K. : After nearly 18 months of deliberations, the government on Saturday announced the Unified Pension Scheme (UPS) with new features for its employees. Those who have joined government jobs since 2004 and are covered under the National Pension Scheme (NPS) will have the option to transfer to the UPS. This will be implemented from April 2025. Do things really change? Is this a reversal of pension policy?

How different is UPS from NPS

Those who joined central government jobs since 2004 are not part of the Old Pension Scheme (OPS). It is a defined benefit scheme that provides 50% of the last salary as pension for life, with inflation adjustments twice a year. Instead, they moved to the NPS, originally called the New Pension Scheme. A defined contribution scheme, where employees contribute 10% of their salary. The government makes a matching contribution. The government’s contribution was later increased to 14%. The corpus was invested in government securities, shares and corporate bonds. Like a mutual fund, it has a daily net asset value. At the time of retirement, at least 40% of the fund has to be used to buy an annuity.

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Under the UPS, the Centre now gives an assurance that employees who have worked for 25 years or more will get 50% of the average salary of the last 12 months as pension with inflation adjustment through dearness allowance. There will also be a family pension for the spouse of the deceased contributor. There will be a minimum monthly payout of ₹10,000 for those who have worked for 10 years. There is an additional benefit in the form of a lump sum payment at the time of retirement, which is linked to the number of years a person has worked for the government.

Why was this change made?

Most states opted for the NPS, but there was mounting pressure on the Centre for a guaranteed pension. States such as Rajasthan, Himachal, Jharkhand and Punjab opted out of the NPS to return to the OPS. In Himachal, this was seen as a major factor in the Congress’s assembly election win. The BJP government at the Centre refused to switch to an unguaranteed pension system, arguing that it would burden future generations. In March 2023, prompted by electoral setbacks, it set up a committee headed by T V Somanathan, then finance secretary. The panel relied on the Andhra model to assure 50% payouts.

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Will most government employees choose UPS?

With regard to the Unified Pension Scheme, Somanathan says that barring a few exceptions, more than 99% of employees will be better off. While a corpus built over a work life of 30-35 years will see many ups and downs, it will largely be protected from market fluctuations. The corpus also depends on the investment mix that a government employee can choose. The default option allows up to 65% in government securities, 15% in equities and the rest in corporate bonds. The medium life-cycle investment plan allows up to 50% equity exposure for people up to the age of 35. Before the equity component starts to reduce. Under this plan, at the age of 55, the exposure to equities and corporate bonds is reduced to 10%, with 80% invested in government securities.

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Since annuity rates are low in India, getting a return of 50% on your investment requires a very large corpus. This may not be possible for a large number of employees. A promised 50% pension would be a safe bet for government employees, many of whom are risk averse.

Would selecting OPS be a step backwards?

No. UPS has stuck to the basic principle of a defined contribution scheme but provided top-ups that limit the government’s spending towards pensions. The government will only bridge the gap between market returns and 50% of the assured pension. Where it diverges is in the assured minimum payout of ₹10,000 and a lump sum payment for those who work for 10 years. Also, government employees are protected from inflation fluctuations, unlike private sector subscribers of NPS.

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Is UPS unfunded?

Unlike the old pension scheme where the budget makers create a pension reserve or pension fund like a company does, not provide funds, UPS relies on actuarial calculations to estimate how much liability will arise to bridge the gap. Somnath said the actuarial assessment will be done every three years.