Unified Pension Scheme (UPS): Key Components, Differences from OPS and NPS, and Reasons for Change

The Union Cabinet has approved the Unified Pension Scheme (UPS), which will be launched on April 1, 2025. The scheme aims to provide old age income security to around 23 lakh Central government employees. Employees under the National Pension System (NPS) will have the option to switch to UPS, and States may also bring their employees under the scheme with independent funding.

Key Components of UPS

1.  Monthly Pension: Employees will receive a pension equal to 50% of their average basic pay over the last 12 months of service, provided they have at least 25 years of service. Those with fewer years will receive proportionately lower pensions, with a minimum pension of ₹10,000 for those with at least 10 years of service.

2. Family Pension: In case of the employee's demise, the family will receive 60% of the pension that the employee was receiving or would have received.

3. Inflation Protection: Pension incomes will be adjusted in line with consumer price trends to protect against inflation.

4. Lumpsum Superannuation Payout: A lumpsum payout equivalent to 1/10th of the monthly emoluments for every six months of service will be provided at retirement, in addition to gratuity benefits.

5. Government Contribution: Employees contribute 10% of their salary to the UPS, while the government contributes 18.5%, with potential adjustments over time.

Differences from Current Systems

• Old Pension Scheme (OPS): Provided an assured pension at 50% of the last drawn salary, with the option to commute 40% of the pension for a lumpsum. Additionally, pensions increased with age, starting at 80 years.

• National Pension System (NPS): A defined contribution system where 10% of employees' salaries, matched by the government, is invested in market-linked securities. There is no assurance of fixed pension benefits.

• Unified Pension Scheme (UPS): Combines features of both OPS and NPS, offering a defined benefit (like OPS) and a defined contribution system (like NPS), but without the commutation option and specific age-based hikes.

Reasons for the Change

The UPS was introduced in response to dissatisfaction with the NPS, which lacked assured pension incomes. The NPS had become a contentious issue, leading some states to revert to the OPS. The UPS aims to address these concerns while maintaining fiscal prudence, as guided by a committee headed by former Finance Secretary T.V. Somanathan.

Reactions from Employees and States

Central government employees have generally welcomed the UPS but have concerns about the lack of a commutation option and specific details on age-based pension hikes. Economists are also cautious, noting the potential impact on government finances, with additional costs estimated at ₹7,050 crore this year. Future pension payouts will likely be higher, but could be managed through increased revenue growth.