Context:
The Union Cabinet has sanctioned the Unified Pension Scheme (UPS), designed to ensure a guaranteed pension for government employees post-retirement. Scheduled to commence on April 1, 2025, this scheme will replace the existing National Pension System (NPS) for central government employees. Additionally, state governments will be given the choice to adopt this new pension framework.
Relevance:
GS II: Government Policies and Interventions
Dimensions of the Article:
- Unified Pension Scheme Provisions Overview
- Fiscal Implications of UPS
- About National Pension System
- About Old Pension Scheme
Unified Pension Scheme Provisions Overview
Pension Calculation
- Base Amount: Employees will receive 50% of their average basic salary from the last 12 months before retirement if they have at least 25 years of qualifying service.
- Proportional Reduction: For those with less than 25 years but at least 10 years of service, the pension amount reduces proportionately.
Minimum Pension Guarantee
- Assured Pension: Regardless of the base amount calculation, the scheme guarantees a minimum pension of Rs 10,000 per month after 10 years of service.
Family Support
- Assured Family Pension: In the event of the retiree’s death, their immediate family is entitled to 60% of the pension the retiree was receiving.
Inflation Adjustment
- Indexation Method: Pensions will be indexed to inflation based on the All India Consumer Price Index for Industrial Workers, ensuring adjustments for cost of living increases.
- Dearness Relief: Provides additional financial support to account for inflation impacts on the three types of pensions mentioned.
Additional Retirement Benefits
- Lump Sum Payment: Upon retirement, employees receive a lump sum equivalent to 1/10th of their monthly earnings (salary plus dearness allowance) for each six-month period completed at retirement. This benefit is in addition to the regular gratuity.
- Gratuity: A separate gratuity payment is provided as a thank-you for the employees’ service, calculated based on total years of service and final salary.
Option to Choose Pension Plan
- Flexibility in Choice: Employees have a one-time option to choose whether to continue with the National Pension System (NPS) or switch to this Unified Pension Scheme. Once chosen, this decision is irreversible.
Fiscal Implications of UPS
The fiscal implications of implementing the Unified Pension Scheme (UPS), especially in a context where governments already grapple with high debt and significant debt-to-GDP ratios, can be substantial:
- Increased Fiscal Burden: The UPS, which resembles the more traditional Old Pension Scheme (OPS), promises defined benefits post-retirement, which might require higher current and future government outlays compared to the more market-dependent National Pension System (NPS).
- Potential Strain on Government Finances: If all states were to adopt UPS, the fiscal pressure could be intense, particularly because it commits significant government funds to pensions, irrespective of the actual returns on pension fund investments. The Reserve Bank of India’s projection that this could lead to costs up to 4.5 times that of the NPS underscores the potential for severe financial strain, amounting to 0.9% of GDP annually by 2060.
- Impact on Debt-to-GDP Ratio: The scheme could exacerbate an already high debt-to-GDP ratio, leading to potential challenges in fiscal management and sustainability. Higher pension liabilities could lead to increased government borrowing, worsening fiscal metrics and potentially affecting credit ratings.
About National Pension System
- National Pension System is a defined contributory pension introduced by Government of India.
- Any employee from public, private and even the unorganised sectors can opt for this. Personnel from the armed forces are exempted.
- The scheme is open to all across industries and locations.
The other eligibility criteria for opening an NPS account:
- Must be an Indian citizen.
- Must be between the ages of 18 and 65.
- Must be KYC compliant.
- Must not have a pre-existing NPS account.
NPS Benefits
- NPS offers returns higher than traditional instruments like the PPF (Public Provident Fund).
- It offers many investment options to subscribers who also have a say in where their funds are invested.
- The NPS reduces the retirement liabilities of the government.
- If the subscriber has been investing for at least three years, he/she can withdraw up to 25% for certain purposes before retirement (age 60). This withdrawal can be done up to 3 times with a gap of at least 5 years between each withdrawal. These restrictions are only for tier I and not tier II accounts.
- The entire amount cannot be withdrawn by the account-holder on retirement [Changes to be introduced]. As of April 2021, 60% can be withdrawn which has now been made tax-free. The rest 40% has to be kept aside so that the subscriber can receive a regular pension from an insurance firm.
The story so far about NPS
- Started as the New Pension Scheme for government employees in 2004 under a new regulator called the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension System (NPS) has been open for individuals from all walks of life to participate and build a retirement nest-egg.
- Given the dominance of informal employment in India, the Employees’ Provident Fund Organisation, which is contingent on a formal employer-employee relationship, only covers a fraction of the workforce.
- The NPS has been gradually growing in size and now manages ₹5.78 lakh crore of savings and 4.24 crore accounts in multiple savings schemes.
- Of these, over 3.02 crore accounts are part of the Atal Pension Yojana (APY), a government-backed scheme for workers in the unorganised sector that assures a fixed pension payout after retirement.
- The rest constitute voluntary savings from private sector employees and self-employed individuals, for whom some significant changes are on the anvil.
About Old Pension Scheme
- Pension to government employees at the Centre as well as states was fixed at 50 per cent of the last drawn basic pay.
- The attraction of the Old Pension Scheme or ‘OPS’ — called so since it existed before a new pension system came into effect for those joining government service from January 1, 2004 — lay in its promise of an assured or ‘defined’ benefit to the retiree.
- It was hence described as a ‘Defined Benefit Scheme’.
- To illustrate, if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000.
- Also, like the salaries of government employees, the monthly payouts of pensioners also increased with hikes in dearness allowance or DA announced by the government for serving employees.
Dearness allowance
- DA — calculated as a percentage of the basic salary — is a kind of adjustment the government offers its employees and pensioners to make up for the steady increase in the cost of living.
- DA hikes are announced twice a year, generally in January and July.
- A 4 per cent DA hike would mean that a retiree with a pension of Rs 5,000 a month would see her monthly income rise to Rs 5,200 a month.
- As on date, the minimum pension paid by the government is Rs 9,000 a month, and the maximum is Rs 62,500 (50 per cent of the highest pay in the Central government, which is Rs 1,25,000 a month).
Concerns with the OPS
The pension liability remained unfunded:
- There was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
- The Government of India budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.
- The government estimated payments to retirees ahead of the Budget every year, and the present generation of taxpayers paid for all pensioners as on date.
- The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
The OPS was also unsustainable:
- For one, pension liabilities would keep climbing since pensioners’ benefits increased every year; like salaries of existing employees, pensioners gained from indexation, or what is called ‘dearness relief’ (the same as dearness allowance for existing employees).
- And two, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
- Over the last three decades, pension liabilities for the Centre and states have jumped manifold.
- In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and the outgo for all states put together was Rs 3,131 crore.
- By 2020-21, the Centre’s bill had jumped 58 times to Rs 1,90,886 crore; for states, it had shot up 125 times to Rs 3,86,001 crore.
-Source: Indian Express
