Unified Pension Scheme (UPS) Notified; Employees have Choice Between UPS and NPS
The Finance Ministry has notified the Unified Pension Scheme (UPS), offering central government employees covered under the National Pension System (NPS) an assured pension of 50% of the average basic pay over the last 12 months prior to superannuation. The contributory UPS provides employees with the flexibility to opt between UPS and NPS, with a minimum guaranteed payout of Rs. 10,000 per month for those serving at least 10 years. Unlike the old pension scheme (OPS), UPS ties payouts partially to market returns but increases the government’s contribution to 18.5%. Effective from April 1, 2025, the scheme aims to address long-standing concerns over NPS inadequacies.
What is the Unified Pension Scheme?
New Framework for Pension Benefits
The Unified Pension Scheme (UPS) promises an assured pension equal to 50% of the average basic pay drawn over the last 12 months before retirement.
Employees must have a minimum qualifying service of 25 years to receive the full assured payout. For shorter service periods, a proportionate payout will be provided.
Applicability
The scheme applies to Central Government employees under the NPS and offers them the option to switch to UPS.
Future employees of the central government can also choose between UPS and NPS upon joining.
Key Features of the UPS
Guaranteed Minimum Payout
Employees retiring with at least 10 years of qualifying service will receive a minimum guaranteed payout of Rs. 10,000 per month.
For those opting for voluntary retirement after 25 years of service, the payout will commence on the date they would have retired if they had stayed in service.
Family Benefits
In the event of the employee’s demise post-superannuation, a family payout of 60% of the pension will be provided to the legally wedded spouse.
Dearness Relief (DR)
Both the assured and family payouts are eligible for Dearness Relief, calculated similarly to the Dearness Allowance (DA) provided to active employees, based on the All India Consumer Price Index for Industrial Workers (AICPI-IW).
Transition from NPS to UPS
Option to Switch
Existing employees under NPS on the effective date of UPS implementation, as well as future employees, can opt for UPS.
Once the UPS option is selected, the outstanding corpus in the employee’s Permanent Retirement Account Number (PRAN) will be transferred to the UPS corpus.
Determination of Qualifying Service
Upon superannuation or retirement, the Head of Office will determine the employee’s qualifying service period under the UPS option.
Government Contributions Under UPS
Enhanced Employer Contribution
The government’s contribution to UPS will increase from 14% under NPS to 18.5%, effective from April 1, 2025.
Employees are required to contribute 10% of their basic pay and dearness allowance, making UPS a contributory scheme.
Market-Linked Returns
Unlike the old pension scheme (OPS), payouts under UPS depend partially on market returns from investments, predominantly in government debt instruments.
Comparison Between UPS, OPS, and NPS
| Feature | Unified Pension Scheme (UPS) | Old Pension Scheme (OPS) | National Pension System (NPS) |
|---|---|---|---|
| Payout | 50% of the average basic pay for the last 12 months before retirement | 50% of the last drawn basic pay | Market-linked returns |
| Employee Contribution | 10% of basic pay + DA | No contribution (GPF contributions only) | 10% of basic pay + DA |
| Government Contribution | 18.5% | Not applicable | 14% |
| Eligibility | Central Government employees covered under NPS | Pre-2004 government employees | Employees joining after January 1, 2004 |
Implications for Employees
Enhanced Security for Retirees
The UPS offers a guaranteed minimum payout, addressing a key criticism of the NPS, which lacks assured returns.
Employees also benefit from Dearness Relief, ensuring inflation-adjusted payouts.
Flexibility to Choose
Employees have the freedom to decide between UPS and NPS, catering to their financial goals and risk preferences.
Historical Context and Policy Development
Background of the Reform
The Old Pension Scheme (OPS), effective before 2004, provided 50% of the last drawn basic pay as pension but required no employee contribution.
The National Pension System (NPS), introduced in 2004, offered market-linked returns but lacked a guaranteed payout, leading to dissatisfaction.
Catalyst for UPS Implementation
Several non-BJP-ruled states reverted to the OPS due to dissatisfaction with NPS, prompting the central government to review the system.
A committee chaired by TV Somanathan, formed in April 2023, recommended reforms to address NPS shortcomings, resulting in the UPS framework.
More Options for Government Employees
The Unified Pension Scheme (UPS) marks a significant evolution in India’s pension policy, blending market-linked returns with assured payouts to create a balanced approach. By increasing the government’s contribution and offering employees the flexibility to choose between UPS and NPS, the scheme addresses long-standing concerns over retirement security. As UPS becomes operational in April 2025, it is expected to provide a more robust and equitable pension framework, benefiting millions of central government employees.
