Comparative view on Unified Pension Scheme: Is It a Better Choice?

Summary: The Unified Pension Scheme (UPS) has been introduced as an alternative to the old and new pension schemes for government employees. UPS offers a guaranteed pension of 50% of the average basic pay from the last 12 months of service, with inflation adjustments, while the old scheme provided 50% of the last month’s salary and dearness allowance without employee contributions. The new scheme requires employees to contribute 10% of their basic salary, with the government matching up to 14%. UPS eliminates the benefits of voluntary retirement and the old scheme’s commutation benefits, and requires employees to contribute 10%, whereas the old scheme was fully government-funded. Although UPS promises a fixed pension and inflation adjustments, it may still face challenges as the old pension system remains financially beneficial for some retirees. The transition to UPS might not fully address the disparities between old and new schemes and could face resistance from employees accustomed to the previous systems. The scheme’s overall impact remains to be seen, especially concerning its financial sustainability and employee acceptance. Also Read: Salient Feature of Newly Introduced Unified Pension Scheme (UPS) For Govt. Employees

Introduction: There has been a lot of discussion about the old and new pension scheme (NPS) across the country for the past few months. There have been agitations in many states to reimplement the old pension scheme instead of the new pension scheme. Now the central government has brought ‘UPS’ i.e. Unified Pension Scheme for the benefit of government employees. The Central government employees can choose either the New pension scheme or UPS scheme. Naturally, the employees will have some questions like who will benefit from this, and what will be the component of the interest, how the calculations will be made, whether commutation of pensions would be available or not? etc. Most importantly, the employees who joined the service from 1st April 2004 have been permitted to join this scheme. This scheme will benefit all government servants as compared to new pension scheme, it is felt.  Government employees have roughly 5% strength in overall employment in the country. Once again it has been proved that the benefits can be reaped if organized. The remaining 95% of the unorganized employees will still be waiting for such type of a scheme in the years ahead. However, it cannot be profoundly said that the dispute between a selection of either the old or unified pension by the employees can be resolved with the introduction of this Unified pension scheme. It appears at the outset that the old pension system is still financially more beneficial for retiring government employees. In the Unified Pension Scheme, pension is determined based on only the average of last year’s basic salary pay. The sum payable will be 50% of the last year’s average, while in the old pension system, 50% of the last month’s basic salary and dearness allowance are taken into consideration. The key issue is the financial benefit. In addition, the benefit of voluntary retirement with full benefit of pension is not available in the Unified pension scheme, which was available with the old pension scheme. The commutation of pension benefit is also not on the same lines as that of old pension scheme. Another deficiency would be that the employee will have to contribute 10% towards pension which was not the case  in old pension scheme where entire contribution was made by the government.

Features of the Old Pension System and Reasons for Discontinuance

Under the old retirement scheme, government employees get pensions according to a pre-determined formula. It is equivalent to 50% of the last drawn salary which comprises of  the dearness allowance as well. They also get the benefit of twice a year revision of inflation relief. The payout is fixed and no deductions are taken from the salary. Moreover, under this scheme, a general provident fund was also provided. This mechanism known as general provident fund contribution, which provides or enables employees to set aside a known portion of their income. GPF is only available to all government employees in India. All these government employees are expected to contribute 8.33 percent of their salary to GPF, and the total amount accumulated throughout the employment period is returned to the employee at the time of retirement with accumulated interest. Moreover, a dearness allowance was included to compensate for the constant increase in the cost of living, which is calculated as a part of the basic salary. Therefore, every time the government increases the dearness allowance, the government also increases the dearness allowance in pension for retirees. This action, adjusts pension amount to compensate for the rising cost of living. Employees are eligible for a maximum gratuity payment of Rs.20 lakhs. The payments facilitated by this scheme are executed from the exchequer. Pensions are financed directly by the government. In case of death of a retired employee, his family gets the benefit of a pension. It is noteworthy that no deduction is made from the salary of the employee for the purpose of pension contribution under this scheme. Most importantly, the scheme was a lifetime income, guaranteeing income for all life after retirement. However, the scheme was discontinued in 2004 due to the following reasons.

 1. Lack of corpus

There was no reserve or corpus to take responsibility for the payment of pension, which would grow continuously and could be used to pay the amount. This was the main problem. The Government of India had to make a provision in every year’s budget for the payments to be made to retirees. The reason was that when the said scheme was adopted it was not having apportioned resources for making payments. There was no clear plan as to how and where the pension would be paid for years into the future.

 2. Salary increase and inflation

The pension payments burden continues to increase as the salaries of existing employees, and pensioners benefit from indexation, or what is called ‘dear allowance’, increase every year.

 3. Health facilities

Better health facilities have increased life expectancy and forced long-lived workers to pay extended pensions for many years.

 4. Increasing financial burden

In 1990-91, the figure was Rs 3,272 crore for the Center and Rs 3,131 crore for the States. Three decades later, in 2020-21, Rs 1,90,886 crore for the Center and Rs 3,86,001 crore for the states – a 58- and 125-fold increase, respectively. The new UPS will put an additional burden of Rs 6,250 crore on the government exchequer annually. The cost will vary from year to year depending on the variation in the number of employees.

What was planned to solve the related problems?

Due to the reasons specified above, the central and state governments have a huge financial burden of pensions. And it was increasing. An expert committee appointed by the Union Ministry of Social Justice and Empowerment in 1998 for the Old Age Social and Income Security (OASIS) project prepared a report in January 2000. The salient recommendations were as follows

1. OASIS was primarily aimed at unorganized sector workers who lacked income security in old age

2. Individuals were given the option of investing in safe, balanced and growth funds –– for which six such funds were to be launched by managers.

3. The balance was to be invested in corporate bonds or government securities. Service to the said persons was to be provided.

4. After retirement, a minimum of Rs 2 lakh from the retirement account was to be used to purchase an annuity.

5. The annuity provider invests the amount as directed above and can accumulate a fixed monthly income –

The above report formed the basis of the new pension scheme notified in December 2003. The Central Government implemented a National Pension System (except for the Armed Forces) from January 2004. In 2018-19, to streamline the New Pension Scheme and make it more attractive, the Union Cabinet approved changes in the scheme to benefit Central Government employees covered under the New Pension Scheme. This plan was to achieve success in the following aspects

1. The new pension scheme was launched as a way to relieve the government of pension growing liabilities.

2. According to a news report citing research from the early 2000s, India’s pension debt had reached unmanageable levels.

3. With the introduction of the new pension scheme, the Central Civil Services (Pension) Rules, 1972 were amended.

4. They are allowed to withdraw part of the pension amount in a lump sum after retirement. And the remaining amount was allowed to be used to purchase an annuity for regular income.

5. The new pension scheme was to be implemented and regulated by the Pension Fund Regulatory and Development Authority in the country.

6. The National Pension System Trust established by the Pension Fund Regulatory and Development Authority is the registered owner of all assets under the new pension scheme.

Features of the new pension scheme:

1. Who can become member?

The all-citizen model of the new pension scheme allows all citizens of India (including NRIs) between the ages of 18 and 70 to join the scheme. Launched in January 2004, the National Pension System was initially designed for government employees but expanded to include all sectors in 2009.

2. Participatory scheme

It is a participatory scheme, where employees contribute to their pension corpus through their salary and matching contributions from the government, then the fixed fund is invested in investment schemes through pension managers. Regulated by the government and the Pension Fund Regulatory and Development Authority, the scheme was designated as a long-term, voluntary investment scheme designed for retirement savings.

3. Contribution

Under the scheme, government servants were required to contribute 10% of their basic salary to NPS, while their employers contributed up to 14%. After retirement, members can withdraw a portion of their savings, while the remaining amount is used to pay a monthly pension, ensuring a stable post-retirement income. It has two tiers: Tier 1 accounts, which restrict withdrawals until retirement, and Tier 2 accounts, which offer more flexibility by allowing early withdrawals.

4. Option to choose funds conferred

In 2019, the Finance Ministry said that central government employees have the option to choose pension funds and investment types. Employees can choose from various investment schemes ranging from low-risk to high-risk managed by pension fund managers. These include public sector banks, financial institutions, and private companies.

5. Pension nearly equal to 35% of retirement pay and tax benefits

At retirement, 60% can be withdrawn, which is tax-free, and the remaining 40% is invested in an annuity, on which the income is taxed which is approximately 35% of their final salary. The NPS also offers tax exemptions under Section 80 CCD of the Income Tax Act, which allows tax exemption on contributions up to Rs 1.50 lakh.

6. No Dearness Allowance Adjustment:

NPS does not provide for automatic Dearness Allowance increase to account for inflation, which makes the pension amount potentially volatile and less predictable.

Problems with New Pension Scheme:

Unlike the then old new pension scheme, employees are required to deposit 10% of their basic pay along with dearness allowance. There is no GPF benefit and the pension amount is not fixed. A major problem with the scheme is that the market-linked nature of the scheme means that pension payouts can vary significantly, creating uncertainty among employees. Additionally, tax implications added another layer of complexity and frustration.

Salient Features of Unified Pension Scheme

1. Assured Pension:

Retirees will get a guaranteed pension of 50% of their average basic pay from the last 12 months preceding retirement and a fixed amount of pension which applies to those with a minimum 25 years of service. For a short service period, the pension will be pro rata, a minimum 10 years of service is required.

 2. Assured Family Pension:

In case of death of an employee, the family will get 60% of the pension amount that the employee was receiving at the time of death, thereby providing continued financial support to the dependents.

3. Inflation will be taken into account:

The pension will be adjusted for inflation through dearness allowance.

4. Contribution Amount:

Under this scheme, the contribution of employees will remain the same. However, the government will increase its contribution from 14% to 18.5%.

5. What to get in retirement?

At the time of retirement under this scheme, a lump sum payment will be given on retirement along with gratuity. 1/10th of the monthly pay (basic pay + dearness allowance) on the date of retirement for every six months of completed service. This payment will not reduce the guaranteed pension amount.

6. Minimum Pension:

Under this scheme, retirees will receive 50% of their average basic pay in the last 12 months before retirement for at least 25 years of qualifying service. For short service, the pension will be pro rata with a minimum 10 years of service. A pension of Rs 10,000 per month will be paid after at least 10 years of service.

7. Pension under UPS linked to inflation:

Pension under this scheme will be indexed to inflation. Inflationary allowance based on the All India Consumer Price Index for industrial workers will be the same as for serving employees.

8. In case of death of pensioner

In case of the unfortunate death of a pensioner, his family will receive 60% of the pension the employee was receiving.

9. Funding for UPS;

Unlike this plan, where budget makers do not set aside funds like a company would set aside for pension reserves, this plan is based on actual calculations to assess the liabilities that arise. Actual evaluation will be conducted every three years.

10. What about retirees under NPS?

The provisions of this scheme will be applicable to the erstwhile NPS retirees who have already retired. The arrears of the previous period will be paid with interest at the PPF rate and they will benefit. This is going to be a unique opportunity for these retirees who should immediately opt for UPS in their own interest without any thoughts as it would be a win win situation for them.

11. Switch from UPS to NPS:

Once this plan is selected, the retiree cannot switch back to NPS. According to the government, existing employees and future employees will have an option to join the scheme. However, once the option  is exercised, the choice cannot be changed.

12. Should you opt for this plan?

According to the government, more than 99% of employees will switch to the new Unified Pension scheme. This is true but whether they will abandon the insistence on the old pension system will be a big question. Under NPS, a portion of the fund must be invested in an annuity after retirement. However, since the annuity rates in India are low, substantial funds are required to get a 50% return on investment. A guaranteed 50% pension under this unified pension scheme is a safe option. The Eknath Shinde-led Maharashtra government has become the first state in the country to implement the newly introduced Unified Pension Yojana (UPS) to its employees in a rush. Perhaps, the decision is premature as appears to have done without much analysis and study. There are chances of resistance from the government employees about the haste in which the decision has been taken in light of assembly elections for the state in November 2024. In this scheme, the state will pay a fixed pension to the employees after retirement, while the returns on the National Pension Scheme will be linked to the stock market. A comparison chart has been presented based on the following points regarding all these three pension schemes, from which everyone needs to form their own beneficial opinion. In conclusion, the unified pension scheme will not impress many of the government employees.