Understanding the Unified Pension Scheme (UPS) and its Differences from NPS and OPS

The Union Cabinet of India, led by Prime Minister Narendra Modi, approved the Unified Pension Scheme (UPS) on August 24, 2024. This landmark decision introduces a new pension system aimed at providing enhanced financial security to government employees. The UPS stands as an alternative to the existing National Pension System (NPS) and the older, discontinued Old Pension Scheme (OPS). This article delves into the details of the UPS, highlighting its key features and how it differs from the NPS and OPS.

Key Features of the Unified Pension Scheme (UPS)

1. Guaranteed Pension:

Employees under the UPS will receive a pension equal to 50% of their average basic salary over the last 12 months before retirement. To be eligible, employees must have completed a minimum of 25 years of service. Those with fewer years will receive a proportionally adjusted amount.

2. Family Pension:

In case of the pensioner’s death, their family will receive 60% of the pension amount that was being disbursed at the time of his death.

3. Minimum Assured Pension:

The scheme guarantees a minimum pension of ₹10,000 per month for retirees who have completed at least 10 years of service.

4. Inflation Indexation (Dearness Relief):

Pension amounts, including family pensions, will be adjusted for inflation, ensuring that the value of the pension keeps pace with rising living costs.

5. Lumpsum Payment:

At the time of retirement, employees will receive a lump sum payment in addition to gratuity. It is 1/10th of the monthly salary (basic pay + DA) for every 6 months of completed service. This lump sum payment does not reduce the guaranteed pension.

Implementation

The UPS is set to be implemented on April 1, 2025 and is expected to benefit around 23 lakh central government employees. Employees currently under the NPS will have the option to switch to the UPS, and this choice will be final. The scheme is also open to adoption by state governments, which could potentially extend its benefits to millions more government employees.

Comparing UPS, NPS, and OPS

Let us compare UPS with the existing NPS and the older OPS on the following parameters.

1. Pension Calculation:

• OPS provided a fixed pension amount calculated as 50% of the last drawn basic salary.
• The pension amount in NPS is market-linked and varies based on investment performance. There is no guaranteed pension under NPS. Upon retirement, employees can withdraw a portion of the corpus as a lump sum, while the remaining amount must be used to purchase an annuity, which provides a regular pension.
• UPS brings back the concept of a guaranteed pension.

2. Government contribution:

• OPS was entirely funded by the government and was available to employees who joined service before 2004. No salary deductions were made for pension contributions.
• The National Pension System, introduced in 2004, is a defined contribution scheme. The government contributes 14% of the employee’s salary to the pension fund, while the employee contributes 10%.
• The government’s contribution under the UPS has been increased to 18.5%, providing a  higher level of support compared to the NPS. Employee contributions remain the same as under NPS.

3. Inflation protection:

• In OPS, pensions were adjusted periodically based on inflation.
• NPS gives no direct inflation protection; pension depends on the performance of the investment portfolio.
• UPS takes into account the impact of inflation.

4. Choice and flexibility:

• No choice was offered; all eligible employees were automatically enrolled in OPS.
• Employees have the flexibility to choose their pension fund managers and investment options within NPS, but they are subject to market risks.
• Employees have the one-time choice to opt between NPS and UPS.

5. Family Pension:

• Under OPS, a family pension was provided to the spouse or eligible family members of the pensioner.
• NPS does not have a dedicated family pension plan; however, the remaining corpus can be transferred to the nominee upon the death of the subscriber.
• UPS: In case of the pensioner’s death, the family receives 60% of the pension.

The table below gives a detailed comparison between the three schemes.

Feature	Old Pension Scheme (OPS)	National Pension System (NPS)	Unified Pension Scheme (UPS)
Pension Type	Defined Benefit	Defined Contribution	Defined Benefit
Employee Contribution	None	10% of Basic + DA	10% of Basic + DA
GovernmentContribution	Full Funding	14% of Basic + DA	18.5% of Basic + DA
Pension Guarantee	Yes	No	Yes
Market Risk	None	Yes	No
Inflation Adjustment	Yes	No	Yes
Family Pension	Yes	No (corpus to nominee)	Yes (60% of pension)
Minimum Pension	Not specified	No	₹10,000 per month
Lump-Sum Payment	Gratuity	Partial Withdrawal	Lump-Sum + Pension

Conclusion

The Old Pension Scheme (OPS) provided a reliable and predictable retirement benefit but was financially unsustainable for the government. It posed a significant financial burden on the government due to the guaranteed benefits and inflation adjustments. The National Pension System (NPS) addressed these concerns by shifting the risk to the employee and linking pensions to market performance. But NPS was criticized by several government employees for the lack of assuredness in the pension payout. Hence, UPS could potentially offer the best of both worlds, ensuring financial security for employees while also addressing the government’s long-term fiscal challenges.