The Union cabinet approved the Unified Pension Scheme on Saturday, which will benefit 23 Lakh government employees. This scheme will define the manner of payment of pensions to central government employees after their retirement, and it will provide dignity and Financial security to the employees.
This scheme is available for the employees who have joined after 1st January 2004 and shall be implemented from 1st April 2025.
This article discusses a Unified Pension scheme, its benefits and features, and how it is different from a New Pension Scheme.
1. What is a Unified Pension Scheme?
- The Unified Pension Scheme (UPS) was launched to provide a steady pension to central government employees based on their last drawn salary and length of employment.
- UPS ensured that government employees receive 50% of their basic salary as pension subject to a minimum of INR 10,000.
- The pension shall be subject to inflation-linked increments.
- The Central Government employee can select between the Unified Pension Scheme and the New Pension Scheme (NPS).
- Further, Current NPS subscribers of the central government will have the choice to transfer to the UPS.
2. What are the key Features of the Unified Pension Scheme (UPS)?
The Unified Pension scheme is based on the following five pillars:
a. Assured Pension:
- Under UPS, the employee shall be given an assured pension of 50% of the average basic salary drawn for the past 12 months before superannuation subject to a minimum service period of 25 years.
- For service up to a minimum of ten years of service, this compensation is to be commensurate with shorter service periods.
b. Assures Family Pension
- In case of the death of a Government employee, an assured family pension shall be provided to the family of the deceased employee.
- Pension shall be given of 60% of the last pension given to the employee immediately before his demise.
c. Minimum Pension
- To ensure the financial security of the employees with a low pay scale, a minimum assured pension of INR 10,000 shall be given to the employees.
d. Inflation indexation
- To ensure that the purpose of pension does not get defeated due to inflation, the Unified pension scheme has the feature of an inflation index.
- On assured pension, on assured family pension, and assured minimum pension. Dearness Relief shall be given based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) as in the case of service employees.
e. Lump sum payment at superannuation in addition to gratuity
- 1/10th of monthly emoluments (pay + DA) as on the date of superannuation for every completed six months of service.
- This payment does not diminish the quantum of secured pension
3. What is the difference between UPS and NPS?
Before 2004, the old Pension Scheme was prevailing for payment of pension to the government employees. With effect from 2004, a new Pension scheme was introduced. The NPS differed from the OPS in two key aspects- it eliminates the assured pension and is funded through contributions from both the employee and the government.
However, considering the shortcomings of NPS, the Union cabinet has now approved the Unified Pension Scheme (UPS) wherein few features of the Old pension scheme are restored.
The following are the differences between the Unified Pension Scheme and the New Pension Scheme (NPS):
a. Manner of Computation of Pension amount:
- Under UPS, the pension amount is equal to 50% of the average basic pay of the employee for the last 12 months of the service subject to a minimum period of service of 25 years.
- However, in the case of NPS, the contributions of employees and employers are invested in Debt and Equity instruments, and the pension amount is calculated based on the return generated from such instruments.
- Therefore, NPS did not guarantee any fixed pension to the employee.
b. Minimum Pension:
- The UPS provides a minimum pension of INR 10,000 per month subject to a minimum service of 10 years.
- However, there is no clause of minimum pension under NPS.
c. Difference in employer and employee contribution
- Under NPS, the employees are required to contribute 10% of their basic salary throughout their employment, and the central government is required to contribute 14%.
- Whereas under UPS, such contributions have been changed. Now the government contribution has increased from 14% to 18.5%. However, employee contribution is the same as earlier, i.e., 10% of basic pay.
d. Family Security/ Pension post demise of employee
- Under UPS, If an employee passes away, the family of the employee shall be entitled to 60% of the last pension given to the employee immediately before their demise.
- However, under NPS, the amount of pension to the family of deceased employees is based on the funds lying in the accumulated corpus in the pension fund and annuity plan selected by the employee at the time of retirement. The employee has to choose between the following two-tier account structure:
- Tier-1 Account: A mandatory pension account with tax benefits.
- Tier-2 Account: An optional investment account linked to Tier-1, offering flexibility for withdrawals.
e. Computation of Superannuation:
- Under UPS, the employee shall be given a lump sum amount of superannuation. Such amount shall be computed as 1/10th of monthly emoluments plus dearness allowances as on the date of retirement and calculated based on every six months of the service. Such amount shall be in addition to the gratuity and shall not affect the monthly secured pension of the employee.
- However, under NPS, the employees are permitted to withdraw a maximum of 60% of the balance lying in their employee corpus at the time of retirement. The balance amount is invested further and used for payment of pension every month.
4. Who is eligible to opt for UPS?
- All Central government employees, who have joined after 1st January 2004, are eligible for the Unified Pension scheme at their option. Employee may choose to continue under NPS as well if he wants to.
- Once the option is selected, it can’t be changed.
- Further, this scheme applies to central government employees. However, states may opt for the same as well.
5. Conclusion:
The New Pension Scheme has been a cause of dissatisfaction among the central government employees as it requires employee contributions as well, unlike the old pension scheme where no contribution was required from the employee. Further, the New Pension scheme was offering lower assured returns as the amount was invested in the debt and equity market.
However, UPS has retained the feature of employee contribution of the NPS and has restored the feature of assured pension and assured superannuation from the Old Pension scheme.
