The recently approved Unified Pension Scheme (UPS) is set to place a substantial financial burden on the Indian exchequer, with an anticipated annual cost of Rs 6,250 crore. Effective from April 1, 2025, the UPS will see an increase in the government’s contribution to 18.5% from the current 14%, according to Union Minister Ashwini Vaishnaw.
Despite this increase, employees’ contributions will remain unchanged at 10% of their basic salary. For those retiring before March 31, 2025, and transitioning from the National Pension System (NPS) to the UPS, an arrear of Rs 800 crore will be provided.
The UPS guarantees a minimum pension of Rs 10,000 per month for employees with at least 10 years of service. It also includes a family pension in the event of the pensioner’s death, with dearness relief linked to the All India Consumer Price Index for Industrial Workers (AICPI-IW).
Introduced on January 1, 2004, the NPS was a contributory scheme, contrasting with the previous defined pension scheme that guaranteed 50% of the last-drawn basic pay, regardless of the corpus accumulated. The UPS, however, offers a pension based on the length of service, with payouts linked to the accumulated corpus.
The Union Cabinet’s approval of the UPS on Saturday addresses long-standing demands from government employees, particularly in light of upcoming assembly elections in Haryana and Jammu and Kashmir. Employees currently under the NPS can opt for the UPS, but once the choice is made, it is irreversible.
Under the UPS, employees with 25 years of service will receive a pension equal to 50% of their average basic pay over the last 12 months before retirement. For those with less than 25 years of service, the pension will be proportionate to the length of service, with a minimum qualifying period of 10 years.
The UPS also includes dearness relief based on the AICPI-IW, similar to the provision for serving employees. Information and Broadcasting Minister Ashwini Vaishnaw highlighted the scheme’s role in ensuring financial security and dignity for government employees, reflecting the government’s commitment to their well-being.
This move marks a significant shift from the NPS, which was designed around employee and government contributions. The new scheme addresses concerns raised by various states and employee organisations advocating for a return to the Old Pension Scheme (OPS), which is linked to dearness allowance.
The NPS has been implemented for central government employees, excluding those in the armed forces, who joined after January 1, 2004. Most state and Union Territory governments have also adopted the NPS for their new employees.
In response to calls for pension system improvements, the finance ministry established a committee under former Finance Secretary T.V. Somanathan last year to review and suggest modifications to the NPS. The committee aimed to enhance pension benefits while maintaining fiscal prudence and budgetary discipline.