! will replace the National Pension System, 2004

Date

the government set up a committee in March 2023 to look into the issues and suggest a way forward.
The Union Cabinet on Saturday (August 24) approved the Unified Pension Scheme (UPS) which will provide government employees with assured pension post retirement.
The scheme will be effective from April 1, 2025, according to the government announcement.

NPS v UPS

Under the UPS, there will be a provision of a fixed assured pension
unlike the New Pension Scheme (NPS) which does not promise a fixed pension amount.
The NPS offers a market-linked pension – the contributions are invested, and the accumulated corpus at retirement is to be used to purchase an annuity.
To finance the guaranteed pension, the government will now contribute 18.5 percent of the basic salary of employees, up from 14 per cent.
Since the guaranteed pension will be indexed to inflation, the government will also have to cover the inflation risk.
The government has projected an additional expenditure of Rs 6,250 crore in the first year and Rs 800 crore towards arrears.
The UPS has also reversed one of the most appealing features of NPS—its equitable coverage.

Components

Assured pension
- 50% of the average basic pay from the last 12 months before retirement, for employees with at least 25 years of service
- less than 25 years, the pension will be adjusted proportionally, with a minimum of 10 years of service required.
Assured family pension
Assured minimum pension - 10k after minimum 10yrs service
Inflation indexation
Superannuation in addition to gratuity

Benefits under UPS, 2024

It offers employees – with 25 years or more of service – a pension equal to 50 per cent of their last drawn salary (over the past 12 months).
If the employee dies before retirement, the family will get a pension equal to 60 per cent of the employee’s basic pay.
If the employee quits government service after a minimum of 10 years, the pension will be proportional to the length of service, with a minimum pension of Rs 10,000 per month.
All of these payments will be indexed to inflation, as inflation increases, the nominal value of the pension payment will also increase.
The increase will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) as in the case of employees in service.

Pics

August 2024

No clarity on how the new scheme is going to be operationalised

One possibility is that the government sets up a separate fund for the UPS, collects contributions, invests them, and uses this fund to pay the pension.
The other possibility is that the government continues with the NPS architecture, and everything proceeds as is, except that at retirement, the government guarantees a 50 per cent pension, with an inflation indexation.
The government would have to raise its budgetary allocation on pension to address the potential shortfall in contributions towards assuring a guaranteed pension.

Questions yet to be answered???

Who will manage the funds,
who will do the record-keeping,
will an annuity be purchased at retirement,
how will inflation indexation be done,
will contributions be increased further if funding falls short,
what will be the actuarial assumptions that determine the contribution rate, and
what happens to existing contributions in the NPS?

Current law

The current law mandates that at least 40 per cent of the accumulated corpus be annualised.
This 40 per cent may not be enough to buy a pension that is 50 per cent of the last wage.

Fact

Government employees are a small proportion of the country’s labour force, and yet, they consume a large share of the government’s revenues. Print

States returning back to OPS

Recently, several states, such as Rajasthan, Punjab, Himachal Pradesh, Chhattisgarh and Jharkhand, reverted to the Old Pension Scheme (OPS).
A recent study by the Reserve Bank of India shows that the switch to OPS will increase the pension burden by 4.5 times of the estimated expenditure under NPS.

Pension outgo of states

Non contributory nature of OPS

OPS is non-contributory and fully funded by the government.

Pension plans

The pension plans of governments are primarily classified as defined benefit and defined contribution plan.

Defined benefit plan

In the defined benefit plan, pension is guaranteed from the revenue of the governments.
The benefits are defined based on the employee’s final or average salary.
In India, the pension scheme in the pre-2004 period (OPS) was based on defined benefit plan.

Concerns in defined benefit plan

In the late nineties, there was a growing recognition that rising financial burden of defined benefit schemes would jeopardise the fiscal health of governments.
This was particularly worrisome in the light of the changing demographic profile.
There was also a concern that the defined benefit pension scheme was inequitable as it provided disproportionate benefits to civil servants, while the bulk of the population was devoid of any old age income security.

Indian government set up an expert committee named Old Age Social and Income Security project (OASIS), to deliberate on a sound pension system design.
This brought together experts and academics, who designed the New Pension System (NPS).
The committee submitted its report to the Ministry of Social Justice and Empowerment in January 2000.

NPS

NPS was based on the principles of self-help and thrift, instead of the notion that the state is responsible for payment of pension benefits for life.
It is a defined contribution-based pension plan under which contributions by the employee are matched by equal contributions by the government or the employer.
The pension benefits depend upon the market performance of the pension fund and the government’s fiscal cost is limited to a pre-specified rate of contribution.
All new recruits to civil services from 1 January, 2004 were placed into the NPS. By making the civil servants the early adopters of the system, foundations were laid for a framework, where the bureaucracy had the incentive to make the NPS work well so that it could be used by the larger population.
NPS was extended to all citizens on 1 May, 2009.

Current status

Currently, the pension outgo of the government consists of pension payments to subscribers of OPS, and pension contribution (currently 14 percent) of employees covered under NPS.
For the central government, the outlay on pensions is almost 10 percent of the net tax revenue.
The pension outlay exceeds one-third of the own tax revenues in states, like Bihar, Assam, Odisha, Kerala and Punjab. Print

Universal Pension Scheme (UPS)

February 2025

This will be offered to all citizens, including those in the unorganised sector, would be open to both salaried employees and self-employed individuals.

Currently, workers in the unorganised sector do not have access to pension schemes such as the National Pension Scheme (NPS), but they can subscribe to Atal Pension Yojana (APY).

Under the APY, subscribers receive a guaranteed minimum pension of ₹1,000, 2,000, 3,000, 4,000, or 5,000 per month after the age of 60 years until death, depending on their contributions.

A key difference between the new universal pension proposal and existing schemes, such as those under the Employees' Provident Fund Organisation (EPFO), is that individuals will contribute voluntarily, and the government will not make any contributions from its side.

Live Mint

Atal Pension Yojana

December 2024

Minimum guaranteed pension ranging between 1000 rupees to 5000 rupees per month from the age of 60.

After the subscriber's demise, the spouse will get same pension

After the demise of the subscriber and the spouse, the pension corpus accumulated till 60 years would be returned to the nominee.

Flexible contribution option - monthly, quarterly, half yearly

As of december, 2024, 7.15 crore people enrolled under the scheme, out of which 47% are women.