By Prof Rajkumar Giridhari Singh
Today, in this contemporary world, peace of mind is immensely determined by reliable financial support. Life can get complicated when your income dries out and you still have liabilities and monthly bills. More importantly post-superannuation it may worsen when you are not in your prime to earn sufficient earnings for your living. A pension created by an employer for the benefit of an employee is commonly referred to as an employer pension. It is an arrangement to provide people with an income during retirement when they are no longer earning a steady income from employment. It helps the employees to make themselves financially stable after their retirement. A recipient of a retirement pension is known as a pensioner or retiree. The quality of pension systems varies widely around the world, and there is no one-size-fits-all solution, as each system has developed from distinct economic, social, cultural, and political contexts.
In India, the pension system has evolved significantly over the years. The British initiated the pension system in India following the Indian struggle for independence in 1857. The Indian Pension Act of 1871 was enacted to address issues with the existing pension system, followed by the Royal Commission on Civil Establishment in 1881. According to the 1881 Act, government employees needed at least 10 years of service to qualify for a pension at age 58, providing them with 50% of their last salary on a monthly basis. The Old Pension Scheme (OPS) of 1924 introduced additional benefits, including Dearness Allowance (DA) twice a year. After India’s independence in 1947, government employees received benefits such as 50% of basic pay, a non-practicing allowance, stagnation increments, and a death gratuity. In 1998, the pensionable age was increased to 60 years. OPS, which offered a lifetime income after retirement without salary deductions for pension payments, provided guaranteed pension payments indexed to inflation and pay commissions for retired government employees and their spouses. However, OPS faced criticism for being unsustainable due to the increasing pension liabilities and the significant burden on Central and State governments without a supporting corpus. Consequently, the National Democratic Alliance (NDA) government discontinued OPS in 2004 and introduced the New Pension Scheme (NPS). Launched on January 1, 2004, the NPS is a voluntary, contributory pension plan managed by the Pension Fund Regulatory and Development Authority (PFRDA). In May 2009, the scheme was expanded to include all citizens, including self-employed and informal sector workers. Under the NPS, individuals can contribute monthly until the age of 60 and receive a pension upon retirement. The minimum contribution is Rs. 500, with the option to increase the amount. Government employees contribute 10% of their basic salary plus Dearness Allowance (DA), while the government contributes 14% of the basic salary plus DA each month.
The NPS is a market-linked annuity scheme allowing individuals to make regular investments during their working years and receive an annuity upon retirement. Contributions are pooled into a pension fund that is invested in a diversified portfolio, including corporate equities, government bills, bonds, and debentures. Professional fund managers, regulated by the PFRDA, such as SBI, LIC, and UTI, oversee these investments. At retirement, individuals can withdraw up to 60% of their NPS corpus tax-free and invest the remaining 40% with any of the ten professional fund managers to receive monthly pension annuities. According to the NPS 2009 guidelines, account holders can also withdraw up to 25% of their contributions before retirement. The final pension amount depends on the total corpus accumulated by the time the scheme matures.
The significant shift from OPS to NPS has sparked considerable concern, particularly among government employees who began their service after December 2003. While NPS is considered economically sustainable, OPS is viewed as more favourable for employees. Many employees, supported by their unions, are calling for the reinstatement of OPS and its benefits for those who joined after December 2003. NPS is a contributory scheme with no guarantee of a minimum pension, whereas OPS is a non-contributory scheme with defined and guaranteed benefits. Additionally, under NPS, there is no provision for a family pension after the death of the retiree. In contrast, OPS provides a family pension to the spouse, unmarried daughters, divorced daughters, widowed daughters, and physically or mentally challenged children of the deceased pensioner.
The recent approval of the Unified Pension Scheme (UPS) by the Union Cabinet on August 24, 2024, and its subsequent announcement by the Government of India marks a significant development in the evolution of India’s pension system. Effective from April 1, 2025, the UPS aims to provide guaranteed pensions for government employees. Key features of the UPS include:
1. Guaranteed Pension: Employees who complete a minimum of 25 years of service will receive a pension equal to 50% of their last drawn salary (average basic pay over the last 12 months before retirement). For those with less than 25 years of service, the pension amount will be proportionately reduced, down to a minimum of 10 years of service.
2. Assured Minimum Pension: Employees who retire after at least 10 years of service will receive a minimum pension of Rs. 10,000 per month.
3. Family Pension: In the event of a retiree’s death, their immediate family will be eligible to receive 60% of the retiree’s last drawn pension.
4. Inflation Indexation: The pensions mentioned above will be subject to dearness relief, calculated based on the All India Consumer Price Index for Industrial Workers, similar to the adjustments for serving employees.
5. Lump-Sum Payment at Retirement: In addition to gratuity, retirees will receive a lump-sum payment calculated as 1/10th of their monthly emolument (pay plus dearness allowance) for every six months of service completed at the time of retirement.
According to a government report, the new Unified Pension Scheme (UPS) will benefit the 2.3 million central government employees. This initiative is expected to lead to an additional expenditure of Rs. 6,250 crore in the next fiscal once it is implemented. As part of the scheme’s provisions, the government plans to increase its contribution to the pension fund from the current 14% of basic pay (under the NPS) to 18.5%. However, the contribution rate for existing employees, set at 10%, will remain unchanged.
The introduction of the UPS follows the recommendations of a committee chaired by Cabinet Secretary TV Somanathan, who was Finance Secretary in 2023. The government established this four-member committee in April 2023 to review the pension system for government employees. The announcement of the UPS marks a significant step towards ensuring financial security for government employees after retirement.
Another important aspect of this announcement is that it will extend benefits to past retirees who were under the National Pension System (NPS). These retirees will receive arrears with interest calculated at Public Provident Fund (PPF) rates for the period since their retirement. With the UPS, government employees opting for the new scheme will receive a guaranteed pension, in contrast to the NPS. The UPS will apply to all those who retired under the NPS from 2004 onwards.
Further details about the UPS, including how it will address existing employees under the NPS who have withdrawn 25% of their contributions (as permitted by NPS 2009), are still pending. It remains to be seen whether the tax-free lump sum of 60% of the corpus amount, available under the NPS, will also be offered to employees who choose the UPS.
Ahead of the Union Budget 2024-2025, the Confederation of Central Government Employees and Workers submitted a proposal to the Centre outlining seven key demands, including the restoration of the Old Pension Scheme (OPS). The joint forum advocating for the reinstatement of OPS (NJCA) has urged the finance ministry to replace the contributory National Pension System (NPS) with the non-contributory, guaranteed OPS for government employees and autonomous bodies. The introduction of the Unified Pension Scheme (UPS) reflects the concerns voiced by government employees.
Political analysts might view the UPS as a strategic response to address the dissatisfaction among government employees—a significant political constituency—potentially aimed at countering opposition challenges in upcoming state assembly elections. Nevertheless, the UPS represents a constructive and empathetic approach to meeting the genuine needs of government employees. It is seen as a positive step towards integrating the best aspects of both OPS and NPS.
Everyone desires a relaxed and carefree retirement. The UPS have now addressed the grievances of the employees specifically the stability of income and security to family. In response to the call for OPS the government has introduced UPS, a new avatar of blend of NPS and OPS, it remains to be seen whether UPS will prove to be an optimum alternative to OPS if not better to OPS. We hope this new announcement brings happiness to many families!
(The writer is currently Head, Department of Commerce, North Eastern Hill University and can be reached at [email protected])