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.