The Cabinet has approved the introduction of the Unified Pension Scheme (UPS) with the aim of enhancing the National Pension System (NPS) for Central Government employees. For some time, these employees have expressed concerns regarding the certainty and adequacy of their pensions, particularly seeking assurances related to pension amounts, family pensions, minimum pensions, and inflation-linked adjustments. While the government acknowledges these concerns, it is also committed to safeguarding the interests of the general public by ensuring that pension obligations do not lead to an excessive tax burden in the future.
To address these issues, the government established a committee led by the Finance Secretary to review the existing NPS and propose improvements. This committee engaged in consultations with State Governments, employee representatives, associations, experts, and even the Reserve Bank of India to gather a wide range of inputs and perspectives. The committee has since completed its review and submitted a set of recommendations, which have now formed the basis for the UPS.
The committee’s recommendations were discussed in detail with employee representatives through the Staff Side of the National Council of Joint Consultative Machinery (JCM). These discussions were productive and led to a broad consensus on the new pension scheme.
Key features of the UPS include:
- Assured Pension: Employees who have served for a sufficient period will receive a guaranteed pension of at least 50% of their average salary over the last 12 months.
- Minimum Pension: Employees with at least 10 years of service will receive a minimum pension of ₹10,000 per month.
- Family Pension: In the event of the employee’s death, the spouse will be entitled to 60% of the pension.
- Dearness Relief: Inflation adjustments (dearness relief) will be provided on the assured pension, minimum pension, and family pension.
- Retirement Lumpsum: A lump sum payment will be provided to employees upon retirement.
One significant feature of the UPS is that while the contribution rate for employees will remain unchanged at 10% of their basic pay plus Dearness Allowance (DA), the Central Government will increase its contribution from the current 14% to 18.5%. Additionally, employees who have already retired under the NPS will also benefit from the new scheme, with arrears being paid after adjusting any prior withdrawals.
The UPS will operate with a dual-fund structure:
- Individual Pension Fund: This fund will consist of the employee’s contribution (10% of basic pay and DA) along with the government’s matching contribution.
- Separate Pool Corpus: This will be funded solely by an additional government contribution of 8.5% of the basic pay and DA of all employees.
Employees will have the option to choose their investment strategy for the individual pension corpus. They can withdraw up to 60% of this corpus upon retirement, with a corresponding reduction in their assured pension. The assured pension will be based on the “default mode” of the investment pattern set by the Pension Fund Regulatory and Development Authority (PFRDA), considering full annuitization of the individual pension corpus. If the returns generated by the annuity fall below the assured amount, the government will make up the difference. Conversely, if the returns exceed the assured amount due to the employee’s chosen investment strategy, the employee will benefit from the higher annuity. However, the government’s top-up support will be capped to ensure fairness.
To qualify for the full assured pension, an employee must have at least 25 years of service. Employees with shorter service, but at least 10 years, will receive a prorated pension.
Participation in the UPS is optional; employees may choose to remain with the current NPS if they prefer. The UPS will come into effect on April 1, 2025, with the necessary administrative and legal frameworks being established in the interim.
State Governments have the option to adopt the UPS, which could potentially benefit over 90 lakh employees nationwide, including 23 lakh Central Government employees, 3 lakh employees of Central Autonomous Bodies, 56 lakh State Government employees, and 10 lakh employees of State Autonomous Bodies.
While the UPS offers significant benefits to government employees, it also ensures that the financial responsibility of the pension system is fully funded by the government each year. This approach prevents the deferral of pension expenses, thereby protecting future generations from fiscal strain.
