On August 4, the Union Cabinet approved yet another modification to the National Pension System (NPS), the scheme applicable to 23 lakh Central government employees who joined service on January 1, 2004, or later. The NPS, which was earlier called the New Pension Scheme as it replaced the Old Pension Scheme (OPS), has also been adopted by most State governments and autonomous bodies receiving government funding. Employees under the NPS are now being offered the Unified Pension Scheme (UPS) as an “improvement” on the NPS, with the scheme coming into effect from April 1, 2025.

Those who joined before January 1, 2004, are covered under the OPS. The announcement came as a surprise because it was only in February that the Ministry of Personnel, Public Grievances and Pensions held a review meeting on the operationalisation of the NPS Oversight Mechanism, established in 2019. The government went out on a limb to defend the NPS and explain why the OPS was unviable. 

Within six months, everything seems to have changed. The employees’ demand to restore the OPS, combined with upcoming elections in three States and one Union Territory as well as byelections in Uttar Pradesh, appear to be the reason for the about turn. But the government is yet to notify it.

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Last year, the non-BJP-led governments in Rajasthan, Himachal Pradesh, Chhattisgarh, Jharkhand, and Punjab informed the Central government and the Pension Fund Regulatory and Development Authority that they were reverting to the OPS. The Congress’ election manifesto for the Lok Sabha and Assembly elections clearly stated that the OPS would be restored.

Barring the BJP’s own affiliate mass organisations, there has been little or no support for the UPS. No political party has openly opposed it, but their trade union affiliates have. Large sections of employee associations are not in favour of the UPS, and that is one reason why the government, too, has been rather quiet after announcing the Cabinet decision.

NPS woes

Government employees had three main objections to the NPS: First, it was a contributory scheme, where the government transferred half the responsibility for funding their “pension” to the employees themselves; second, as a market-linked scheme, retirement benefits became subject to the vagaries of financial markets; and third, the investment of the corpus (or a part of it) in an annuity did not offer returns that were indexed to inflation.

According to employees’ organisations, the NPS did not offer financial security for old age. On its part, the Centre from time to time made modifications to the NPS aimed at increasing post-retirement benefits. For instance, the government contribution to the pension corpus was raised from 10 per cent of the salary of employees to 14 per cent, and death-cum-retirement gratuity was also made payable to those under the NPS.

In April 2023, the Centre set up a “Committee to Review the Pension System for Central Government Employees”, headed by Finance Secretary T.V. Somanathan. The UPS is supposed to be based on the recommendations of this committee, though its report has not been made public yet. The committee is supposed to have consulted State governments, representatives of employees, associations, the RBI, and others. Its recommendations were discussed with employee representatives through the national council of the Joint Consultative Machinery (JCM).

Under the UPS, the government proposes to raise the employer’s contribution to 18.5 per cent and also offer a lump sum payment on retirement in addition to the gratuity. The key assurance is that the government will guarantee that the pension of an employee will be at least half the average salary in the last 12 months of service, subject to a minimum service of 25 years (with a proportionate reduction for those with a service duration between 10 and 25 years, subject to a minimum pension of Rs.10,000 a month). The UPS also offers a minimum family pension to the spouse of a deceased employee/pensioner. Besides, the assured minimum pension will be indexed to inflation by the provision of dearness relief.

Government employees do not appear to be satisfied with the UPS, though. Whether or not it will be an “improvement” on the NPS depends on the details, which are still under wraps. What is clear from what is available in the public domain is that employees’ contribution to their pension fund will remain. Moreover, the amount that can be withdrawn as a lump sum will be lower than even that under the NPS because the government will be splitting up its contribution of 18.5 per cent to the corpus. In the UPS, the government’s contribution will be only 10 per cent of the employees’ salary (as against 14 per cent in the NPS). The additional 8.5 per cent of the government’s contribution will be placed in “a separate pool corpus” and will not be part of the individual pension fund of the employee. The UPS also does not offer the possibility of pension increasing when pay scales of current employees are revised.

The new proposals will mean an additional expenditure annually for the government. Also, since the government has promised to make up any “shortfall” from the assured minimum pension in the annuity returns earned by individual pension funds, additional expenditure may be incurred unless the pool corpus earns enough to cover such a shortfall. These financial implications of the UPS have meant that many votaries of the NPS, who believed that the OPS was financially unsustainable, now see the UPS as a step back in pension reforms.

Some economists point out that it was the shift to the NPS in 2004 that contributed to increasing pension-related expenditures of governments. That shift had no implications for the expenditure on pensions of those who were pensioners then, those who have become since, and many of those who will become in the years to come (as long as they joined service before January 1, 2004).

On the other hand, virtually none of the 26 lakh employees (including employees of Central autonomous bodies) of the Central government Sector or the 66 lakh of the State government sector who came under the NPS have retired from service yet and many will not for years to come. Indeed, the first employees who could claim the minimum assured pension under the UPS will retire only in 2029. The government might have “saved” in terms of future pension payments of these employees, but in the past 20 years, it has had to spend an additional amount as its contribution to their pension funds. Had the OPS been retained, it would have had to pay only retired employees from its budgetary resources.

A senior representative of the All India Bank Officers’ Confederation said: “Our GDP is growing at a rate of 6-7 per cent as the government claims. On the other hand, the number of Central government employees is decreasing year on year. The load on the UPS has already come down. Pension is rarely updated, only DA is applied on it.” He added: “The government argues that the pension load has increased. The Rs.10,000 [minimum monthly pension] is coming from our own contribution. Under the Atal Pension Yojana for every citizen, people get Rs.5,000 by contributing. Under the UPS, the government says at least we will get Rs.10,000 if we contribute 10 per cent. It is a joke. It is not at all a unified scheme. It is a misnomer. At best, it can be called the Modi-fied NPS.”

He claimed that from what has been issued so far, the UPS is worse than the NPS. He explained: “We are saying that whatever we are contributing we should get back. What if the spouse is no more, what happens then? The contribution is gone. No lump sum is paid at the end of the scheme, and even when the person is superannuating, five to six months of salary will be given. In the OPS, one gets a lump sum or one can opt for commutation. Under the NPS, there is some assurance of a lump sum even though it is market linked. People can get good returns if the market performs well but there is no assurance.”

Rejecting claims that the Somanathan Committee had consulted representatives of employee associations and organisations, he said that only select trade unions and a few organisations representing employees were consulted. Neither the Finance Ministry, the Somanathan Committee, nor the Prime Minister had approached many of the organisations or different sectors. Even in the Central government, not all employee organisations were consulted, he said. “No one from the banking sector was invited for the consultations,” he added.

Prem Chand, general secretary of the Indian Public Service Employees’ Federation, expressed surprise that the Congress, having declared the restoration of the OPS, was now saying that it would take a decision after seeing the Somanathan Committee report. 

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Prem Chand said that at least 10 organisations had decided, along with the leadership of the JCM, to make the restoration of OPS a national demand. But there was a lot of dilly-dallying by the JCM leadership. “We left the front and formed an Old Pension Restoration Front and finally a big rally was held in Delhi for the OPS on October 1, 2023. We have demanded that the Somanathan committee report be made public. So far, only portions have been leaked. The JCM is a 60-committee membership of which 26 are from the railways. It is not a democratic body even though it is a permanent negotiation mechanism. A full meeting of the JCM has also not been held. An internal committee was formed for consultations with the government,” he said.

Penny wise, pound foolish

According to information available in the annual reports of the Department of Personnel and Training, the number of pensioners of the Central government increased from around 37 lakh in 2005 to almost 54 lakh in 2013 and to over 69 lakh by 2022. The Central government expenditure on pensions, on the other hand, as revealed in the Union Budgets, increased almost 17 times, from around Rs.14,000 crore in 2002-03 (before the NPS) to nearly Rs.2,42,000 crore in 2022-23. This was despite the transition to the NPS. However, this was still less than 6 per cent of total Central government expenditure, and only a fraction of the country’s national income, said employees and dismissed the contention that the OPS was unsustainable.

Again, going by Union Budget figures, the establishment strength of the Central government (excluding defence personnel) was 33.17 lakh in 2003, but in 2023 it was just 31.67 lakh. The only component that has grown is the government’s police forces, whose strength has increased from 6.59 lakh to 10.45 lakh over the same period. In addition is the rise in the proportion of contractual employment, which creates no pension entitlements. The real question then is, What effect does the government’s attempts to reduce expenditure on its employees have on the quality of the services it provides? Even the strength of departments dealing with revenue mobilisation has been reduced. This, employees say, may be a case of the government being penny wise and pound foolish. 

On August 24, the Union Cabinet approved the Unified Pension Scheme (UPS), which guarantees an assured pension to government employees who joined the service after January 1, 2004, under the National Pension System. This optional scheme, which will be applicable from April 1, 2025, will benefit 23 lakh Central government employees, potentially rising to 90 lakh if State governments also join the scheme.

The move was announced ahead of Assembly elections in Haryana and Jammu and Kashmir scheduled for September-October. It came against the backdrop of several non-BJP-ruled States deciding to revert to the dearness allowance-linked Old Pension Scheme (OPS). The UPS also acknowledges the long-pending demands of government employees regarding the payout retired employees received under the existing New Pension Scheme (NPS).

Salient features of UPS

Employees opting for UPS would be eligible for an assured pension of 50 per cent of their average basic pay drawn over the last 12 months before superannuation, with a minimum qualifying service of 25 years. This pension would be proportionately reduced for lesser service periods, down to a minimum of 10 years of service.

The scheme guarantees an assured minimum pension of Rs.10,000 per month on superannuation after a minimum of 10 years of service.

An assured family pension amounting to 60 per cent of the pension drawn by the employee before their demise will be provided.

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Inflation indexation will apply to the assured pension, assured family pension, and assured minimum pension. This will be in the form of dearness allowance (DA) based on the All India Consumer Price Index for Industrial Workers, as for serving employees.

At retirement, employees will be eligible for a lump sum amount in addition to gratuity. This will be calculated as 1/10th of the monthly emolument (basic pay+DA) as on the date of superannuation for every completed six months of service.

For those who are retired or retiring under the NPS until March 31, 2025, the benefits of the UPS will apply, and they will be eligible for arrears. If they opt for UPS, there would be no additional burden.

The employee’s contribution remains at 10 per cent of the salary (basic+DA), while the government’s contribution increases from 14 per cent to 18.5 per cent.

According to outgoing Finance Secretary and current Cabinet Secretary-designate T.V. Somanathan, the expenditure for arrears would be approximately Rs.800 crore, and the exchequer would bear an additional burden of Rs.6,250 crore for the enhanced contribution of 18 per cent in the first year. If any State government joins the UPS, they would bear the additional burden for their employees’ assured pensions.

On August 25, Maharashtra became the first State to approve the UPS, deciding to implement it for all State government employees.

Why India ditched OPS for NPS

Under OPS, retired government employees received 50 per cent of their last drawn salary (basic pay + dearness allowance) as monthly pensions. The amount increased regularly, as DA rates were revised every six months to account for inflation. Unlike provident funds, the OPS required no employee contribution during their service; the government paid the entire amount to the employee post-retirement.

During the tenure of the Atal Bihari Vajpayee-led National Democratic Alliance government (1999-2004), policymakers had raised concerns about the OPS’s long-term sustainability. They argued that since the government bore the entire pension burden without a specific corpus created over time, this liability would rise to fiscally unhealthy and unsustainable levels. This argument also considered the increasing lifespans of retired employees who had access to better healthcare facilities compared with previous decades.

These concerns drove the Centre’s efforts to reform India’s pension policies, leading to the NPS replacing the OPS on January 1, 2004. The NPS is a market-linked pension system where pensions are based on defined contributions from both employees and the government. It requires government employees to contribute 10 per cent of their salary (basic pay+DA), with the government initially matching that contribution. In April 2019, the BJP-led Central government increased the government’s contribution to 14 per cent.

Under the NPS, employees must invest their growing corpus by choosing from a range of pension fund schemes. Currently, these schemes are managed by 11 government and privately-owned fund managers (SBI, LIC, Unit Trust of India, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, Max, Axis, and DSP), all regulated by the Pension Fund Regulatory and Development Authority.

The NPS has been implemented for all government employees joining the Central government on or after January 1, 2004, except those in the armed forces. Most State and Union Territory governments have also adopted the NPS for their new employees.

UPS: A watered-down OPS?

The NPS, in its pursuit of market-linked returns, eliminated the minimum assured pension, which became a contentious issue for employees enrolled in the scheme. The pension amount under NPS depends on investment performance, leading employees to argue that it provided lower assured returns compared to the OPS, despite requiring mandatory employee contributions.

The issue took a political turn when non-BJP-ruled State governments decided to revert to the OPS. In the past two years, States such as Himachal Pradesh, Rajasthan, Chhattisgarh, Punjab, and Jharkhand have reintroduced the old scheme. This led to similar demands from employee organisations in other States.

To address these concerns, the Union Ministry of Finance in 2023 established a committee under then Finance Secretary T.V. Somanathan. The committee’s task was to review the pension scheme for government employees and suggest changes, if necessary, considering the existing framework of the NPS. After announcing the UPS, Somanathan told the media that the proposed system would balance “aspirations with fiscal prudence”.

The UPS appears to be an attempt by the government to combine the best aspects of both systems. While retaining a slightly modified version of the market-linked defined contribution system, it reintroduces an assured minimum pension, making it comparable to the OPS. Shiv Gopal Mishra, secretary of a joint forum of government employees’ organisations, welcomed the UPS, stating that “90 per cent of the provisions under the OPS are there under the UPS”. The Sangh Parivar-affiliated trade union Bharatiya Mazdoor Sangh, while noting some lack of clarity, supported the move, saying that the Centre had attempted to address the NPS’ shortcomings through the UPS.

As expected, Central trade unions affiliated with the opposition parties took a stand against the UPS. The Hind Mazdoor Sabha claimed the new scheme was meant to mislead employees, while Left-affiliated unions like the All India Trade Union Congress and Centre of Indian Trade Unions criticised the Modi-led government, accusing it of using the UPS to further its “neoliberal pursuit of safeguarding the interests of speculative crony capital”.

Political observers suggest that the BJP-led government’s move aims to counter a key electoral strategy of the opposition, particularly the Congress. In 2022, the Congress promised to implement the OPS in Himachal Pradesh before the State Assembly election, which it subsequently won. A government source told The Hindu that with upcoming Assembly elections in four key States/UTs (Haryana, Jammu and Kashmir, Maharashtra, and Jharkhand), the government’s decision means that “all political parties will have to address the issue of pensions in their campaigns”.

Universal non-contributory pension: An idea whose time has come?

In the debate between OPS and NPS, noted economist Prabhat Patnaik proposed the concept of a “universal non-contributory pension scheme.” In an article published in January 2024, Patnaik challenged the government’s reluctance to maintain the OPS due to funding concerns.

Patnaik argued that India’s economic growth figures (6-7 per cent in real terms) suggest that the government’s pension liability would become more manageable over time, rather than increasingly unsustainable. He criticised the Modi government’s refusal to allocate more resources for pensions, calling it “a clear demonstration of class bias, having nothing to do with any sane economic logic”.

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The universal non-contributory pension scheme Patnaik envisions would provide post-retirement benefits not only to the small percentage of workers in the organised sector but also to the millions employed in the unorganised sector. According to 2018-19 estimates cited by Patnaik, nearly 13 crore individuals over 60 in India required a living pension of approximately Rs.3,000 per month.

Patnaik provided a financial perspective on the feasibility of such a scheme. With India’s gross national income (GNI) at Rs.187 lakh crore for 2018-19, the monthly payment of Rs.3,000 to these individuals would amount to just 2.5 per cent of the GNI. He suggested that this sum could be easily raised by imposing a modest 1 per cent wealth tax on the top 1 per cent of the population.

This proposal challenges conventional pension models and suggests a more inclusive approach to addressing India’s retirement security needs across all sectors of the workforce.