Why in the News?

The Union Cabinet approved a new Unified Pension Scheme for Central government employees, set to launch on April 1, 2025, benefiting 23 lakh employees.

What are the main features of the Unified Pension Scheme? 

• Assured Pension: Employees will receive half of their average basic pay from the last 12 months of service as a monthly pension, provided they have served at least 25 years. A minimum pension of ₹10,000 is guaranteed for those with at least 10 years of service.
• Family Pension: Dependents will receive 60% of the government worker’s pension upon their demise (death of a person).
• Inflation Adjustment: Pension incomes will be adjusted for inflation, similar to the dearness relief provided to current employees.
• Lump Sum Superannuation Payout: A lump sum equivalent to 1/10th of an employee’s salary and dearness allowance for every six months of service, in addition to gratuity benefits.
• Contributory Mechanism: Employees will contribute 10% of their salary to the pension pool, while the government will contribute 18.5%.

How is it different from the current pension system?  

1. Old Pension Scheme (OPS): Provided an assured pension at 50% of the last drawn salary with no contributions required from employees.
   1. It also offered an additional pension for pensioners above 80 years and adjustments based on Pay Commission recommendations.
2. National Pension System (NPS): Introduced in 2004, it was a defined contribution scheme with 10% contributions from both employees and the government, but without guaranteed pension amounts.
3. Unified Pension Scheme (UPS): Combines the assured pension model of OPS with the contributory mechanism of NPS, but with a higher government contribution (18.5%) and a guarantee of certain pension benefits.

Why did the government feel the need to bring about this change? 

1. Employee Dissatisfaction with NPS: Government employees, especially those who joined post-2004 under the NPS, were dissatisfied with the uncertainty in pension incomes compared to their predecessors under the OPS.
2. Political and Electoral Considerations: The issue became politically sensitive, with opposition parties promising to revert to OPS in some states, prompting the central government to address these concerns.
3. Balancing Aspirations with Fiscal Prudence: The government aimed to find a middle ground that would satisfy employees while maintaining fiscal discipline.

How have government employees responded?  

• Positive Reception: Government employees have largely welcomed the UPS as it addresses concerns with the NPS by reintroducing assured pension benefits and increasing the government’s contribution, offering greater financial security in retirement.
• Reservations: Despite the positive aspects, there are concerns about the continued contributory nature of the scheme and the absence of a commutation option, with employees seeking more clarity on these issues.

What will be the cost to the exchequer?

1. Immediate Costs: The UPS is expected to cost an additional ₹7,050 crore this year due to the higher government contribution and arrears for some employees.
2. Future Financial Impact: While the initial impact will be the additional 4.5% contribution from the government, the assured pensions will increase future government liabilities. However, economists believe this can be managed through higher revenue growth and can be compared to the impact of Pay Commission revisions.

Way forward: 

• Ensure Clear Communication and Transparency: The government should provide detailed guidelines and clarify any remaining ambiguities about the Unified Pension Scheme (UPS).
• Plan for Long-Term Fiscal Sustainability: To manage the increased financial burden from the UPS, the government should incorporate these commitments into its fiscal planning, potentially exploring new revenue sources to maintain fiscal prudence while ensuring the long-term sustainability of the pension scheme.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now