The Central Government has introduced a new pension scheme for government employees called the Unified Pension Scheme (UPS). This scheme aims to benefit around 23 lakh central government employees by providing them with an assured pension. The introduction of the UPS comes in response to dissatisfaction among employees over the existing National Pension System (NPS) and the earlier withdrawal of the Old Pension Scheme (OPS), which led to concerns about lower retirement savings and returns.
Let’s dive into the key differences between the new UPS and the OPS.
1. How the Assured Pension is Calculated
Both UPS and OPS promise an assured pension to government employees, but the calculation methods differ. Under the OPS, retirees received 50% of their last drawn basic salary plus dearness allowance (DA). In contrast, the UPS bases the pension on the average of the last 12 months’ basic salary and DA before retirement. So, if an employee is promoted just before retiring, the UPS will calculate their pension based on a 12-month average, likely resulting in a slightly lower pension than under the OPS.
2. Employee Contributions to the Pension Fund
Unlike the OPS, where employees did not contribute to the pension fund, the UPS requires contributions from employees. Employees must contribute 10% of their basic pay and DA, similar to the NPS. The government will also increase its contribution to the pension fund from 14% (as in the NPS) to 18.5%. The OPS was often seen as financially unsustainable for the government because it did not require employee contributions.
3. Tax Benefits
Currently, central government employees can claim tax benefits for contributions to the NPS, with a deduction of 14% available under both old and new tax regimes. However, since the OPS did not involve employee contributions, no tax benefits were available. The government has not yet clarified if similar tax benefits will apply to both employee and government contributions under the UPS.
4. Minimum Assured Pension Amount
The UPS guarantees a higher minimum assured pension of Rs 10,000 per month, provided the employee has completed at least ten years of service. In comparison, the minimum pension under the OPS is currently Rs 9,000 per month for those with the same service duration.
5. Lump Sum Payments and Commutation of Pension
The UPS allows a lump sum payment at retirement, calculated as 1/10th of monthly emoluments (Pay + DA) for every six months of completed service. Importantly, this lump sum does not reduce the pension amount, making it a potentially better option than the OPS. Under the OPS, retirees could receive a lump sum by commuting up to 40% of their pension, which reduced the monthly pension amount. The commuted portion is restored after 15 years, but the initial reduction can impact retirees’ income.
Common Features Between OPS and UPS
A shared feature of both the OPS and the UPS is the provision of an inflation-indexed pension to help retirees cope with rising living costs. The pension under the OPS is revised bi-annually, aligned with government adjustments to dearness allowance and relief. Similarly, the UPS will apply inflation indexing to assured pensions, family pensions, and minimum pensions, using the All India Consumer Price Index for Industrial Workers (AICPI-IW) as a benchmark.
Conclusion
The introduction of the Unified Pension Scheme represents a shift in the government’s approach to providing retirement security for its employees. While maintaining some beneficial features of the OPS, such as inflation indexation, the UPS introduces employee contributions and recalculates pension amounts to create a more sustainable and potentially fair system. These changes aim to address previous concerns about pension adequacy and ensure a more balanced financial approach for future retirees.
