Unified Pension Scheme (UPS): What is Indexation Benefit, Understand calculation and example

The Union Cabinet, led by Prime Minister Narendra Modi, has approved the Unified Pension Scheme (UPS), which promises a fixed pension for central government employees. A significant feature of this new pension scheme is the provision of indexation benefits, which were available under the Old Pension Scheme (OPS) but are missing from the market-linked National Pension Scheme (NPS).

What is the Indexation Benefit?

Indexation benefits help ensure that the pension amount keeps pace with inflation, protecting the purchasing power of retirees. Under the UPS, the pension amount for government employees will increase in line with inflation rates. This means that the pension will be adjusted regularly to reflect changes in the cost of living.

How Does the Indexation Benefit Work?

The indexation benefit applies to three main areas:

1. Assured Pension: The pension amount that a retiree receives.
2. Assured Family Pension: The amount given to the retiree’s family if the retiree passes away.
3. Assured Minimum Pension: The minimum pension amount guaranteed to retirees.

Ashwini Vaishnaw, the Minister of Information and Broadcasting, explained that the dearness relief (an increase in pension due to inflation) under UPS will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW). Currently, the pensions and salaries of central government employees are revised twice a year, in January and July, based on this index. This adjustment ensures that the pension amount keeps up with the rising cost of living.

Example of How Indexation Works

To understand how this works in practice, let’s look at an example:

Assumptions:

• Initial Pension: ₹50,000 per month
• Biannual Inflation Rate: 2.5% (based on an assumed annual inflation rate of 5%, split into two 2.5% adjustments)

Step 1: First Adjustment (After Six Months)

• First inflation adjustment = ₹50,000 * 2.5% = ₹1,250
• New pension amount = ₹50,000 + ₹1,250 = ₹51,250 per month

Step 2: Second Adjustment (After Next Six Months)

• Second inflation adjustment = ₹51,250 * 2.5% = ₹1,281.25
• New pension amount = ₹51,250 + ₹1,281.25 = ₹52,531.25 per month

After one year, with these biannual adjustments, the pension would increase from ₹50,000 to ₹52,531.25 per month. This regular adjustment helps maintain the value of the pension over time, ensuring that retirees can afford the same goods and services even as prices rise.

Other Key Features of the UPS

• Pension Amount: Under the UPS, retirees will receive 50% of their average basic pay from the last 12 months before retirement, as long as they have completed a minimum of 25 years of service.
• Family Pension: In the unfortunate event of a pensioner’s death, their family will receive 60% of the pension amount that the retiree was receiving.
• Minimum Pension: The UPS guarantees a minimum pension of ₹10,000 per month for those who retire after at least 10 years of service.

Conclusion

The Unified Pension Scheme aims to provide financial security to central government employees by assuring a fixed pension amount and regularly adjusting it for inflation. This indexation benefit ensures that retirees can maintain their standard of living, making the UPS a significant improvement over the NPS for those concerned about retirement income stability. By protecting the value of pensions, the UPS offers a more predictable and secure retirement future for government employees.