The Union Cabinet has approved a significant shift in the approach to providing old age income security to Central government employees.
A new Unified Pension Scheme (UPS) will be launched on April 1, 2025.
Employees currently enrolled in the National Pension System (NPS) will have the option to switch to the UPS.
States can also include their employees under the UPS but will need to fund it from their own resources.
Key Components of the UPS:
Pension Assurance: Government employees will receive a monthly pension equal to 50% of their average basic pay over the final 12 months of service, after a minimum of 25 years of service.
Proportional Benefits: Employees with less than 25 years of service will receive proportionately lower benefits, with a minimum pension of ₹10,000 for those with at least 10 years of service.
Family Pension: Upon the employee's death, a family pension equivalent to 60% of the worker’s pension will be provided to dependents.
Inflation Adjustment: Pension incomes will be adjusted in line with consumer price trends for industrial workers, similar to the dearness relief provided to serving government employees.
Lumpsum Superannuation Payout: Employees will receive a lumpsum superannuation payout in addition to gratuity benefits at retirement, amounting to 1/10th of the employee’s monthly emoluments for every six months of service.
Differences from the Current System:
Old Pension Scheme (OPS): Employees who joined before January 1, 2004, are under the OPS, which offers an assured pension of 50% of the last drawn salary, family pension, and additional benefits such as dearness allowance hikes and lumpsum commutation.
National Pension System (NPS): Launched in 2004, NPS replaced OPS for new employees and introduced a funded, defined contribution regime. Employees and employers contribute to a pooled fund, with investments in market-linked securities.
Unified Pension Scheme (UPS): Combines the defined benefits of OPS with the defined contribution mechanism of NPS. Employees contribute 10% of salary, and the government contributes 18.5%, with the government covering any shortfall between contributions and pension promises.
Reasons for the Change:
Pushback Against NPS: Government employees have expressed concerns over the lack of assured pension under NPS, leading to dissatisfaction among post-2004 employees retiring with lower benefits.
Electoral and Political Considerations: Opposition parties, particularly the Congress, promised a return to OPS in some states, increasing pressure on the government to address concerns.
Review by the Committee: In March 2023, Finance Minister Nirmala Sitharaman announced a review of NPS, balancing employees' aspirations with fiscal prudence.
The UPS is informed by this committee's findings.
Employee and State Reactions:
General Reception: Central government employees have broadly welcomed the UPS, seeing it as recognition of NPS issues.
However, there are concerns about the contributory aspects and lack of commutation options like the OPS.
Economists' Views: Economists are awaiting more details on the UPS's financial implications.
Assured pensions will add to the government’s committed expenditures, requiring adjustments in the fiscal consolidation roadmap.
Fiscal Impact: The immediate impact will include the additional 4.5% government contribution to UPS, with future payouts being higher but potentially manageable with increased revenue growth.
This adjustment is seen as comparable to Pay Commission revisions.
The shift to UPS reflects the government's response to employee concerns and political pressures, balancing the need for fiscal responsibility with the promise of assured pensions for government employees.
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