On August 24, the Union cabinet approved the Unified Pension Scheme (UPS), a significant step towards providing government employees a secure and assured pension after retirement. The scheme, to be effective from April 1, 2025, not only brings a sense of general optimism but is also a reassurance to government employees regarding their financial security.
Over the last few years, the opposition has highlighted the dissatisfaction of government employees with the National Pension Scheme (NPS), commonly known as the New Pension Scheme. The issues primarily revolve around the uncertainty of the amount due to market fluctuations and the lack of a fixed pension, which the UPS aims to address. The UPS ensures retirees a stable, fixed pension, a crucial benefit not offered by the NPS.
The UPS has three key features. First, assured pension of 50 percent of the employee's average basic pay drawn over the last 12 months before superannuation for a minimum service of 25 years. The amount would go down for a smaller service period, up to a minimum of 10 years. In the case of superannuation, after a minimum of 10 years of service, the UPS provides an assured minimum pension of Rs 10,000 a month. Upon a retiree's death, their immediate family would be eligible for 60 percent of the last drawn pension.
Second, dearness relief will be available on all kinds of pensions, calculated based on the all-India Consumer Price Index for Industrial Workers, as is the case with serving employees.
And third, a lump-sum payment at superannuation will be payable in addition to gratuity. It will be calculated as one-tenth of the monthly emolument (pay plus dearness allowance) on the date of superannuation for every six months of service completed.
Several states, such as Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh, reverted to the Old Pension Scheme (OPS). These states had a non-NDA government at the time. The OPS is non-contributory and unfunded, meaning in the immediate term, the state government did not have to contribute its share to the pension fund, thus saving money. However, this also means a future government would have to pay the money in bulk, creating a financial burden.
While most UPS features are similar to the OPS, the new scheme is not unfunded. Like the NPS, employees will contribute 10 percent of their salary, and the government will contribute 18.5 percent. While the employee contribution threshold will stay at 10 percent, the government's contribution will be adjusted periodically based on actuarial assessments, ensuring it remains appropriate.
In UPS, to give pensions to employees, their pension corpus will be divided into two parts.The individual pension fund will have 10 percent of the employee's basic salary plus dearness allowance (DA) deposited. An equal amount will be deposited by the government. In the guarantee reserve fund, the government will deposit 8.5 percent of the employee's basic salary plusDA. No amount will be deposited by the employee.
Based on a rough estimate, if an employee starts at 25 with a salary of Rs 50,000 and works for 35 years, then around Rs 4 crore will be deposited in his pension fund under UPS. With this, he will get a monthly pension of around Rs 2 lakh yearly. Under NPS, only Rs 3.5 crore will be deposited in his pension fund. He would get a monthly pension of around Rs 1.75 lakh. So, under UPS, employees get around 15% more pension than NPS.
Life expectancy is gradually increasing across the world. As reflected in the table, our retirement age for government jobs is one of the lowest among the top six world economies. With the increase in life expectancy, it is imperative to consider raising the retirement age of government employees in India.
In 1998, the retirement age was raised from 58 to 60 years. However, at that time, life expectancy was only 61.4 years. Fast forward to 2024, and life expectancy has increased to 72.24 years. This significant increase underlines the need to adjust the retirement age to reflect this trend. A higher retirement age would also ensure the effective use of trained and experienced human resources and significantly alleviate the government's pension burden.
One counterpoint against this move is it will increase unemployment by reducing new recruitments for government jobs. As shown in the table, we have one of the lowest percentages of public sector employees as a share of the total workforce. In developed and emerging economies, this ratio is between 7 and 15 percent. We should increase the number of new job openings in the government sector. This will improve governance and efficiency in public delivery and nullify the negative impact on new jobs from the increase in retirement age.
The UPS benefits both employees and the government by providing predictable pensions to retired employees who have dedicated their careers to serving the nation. This is achieved by maintaining the contributory pay and its funding structure without having an unsustainable burden on future governments. To minimise the fiscal impact of UPS on the exchequer, two additional changes of increasing the retirement age and creating more government jobs are proposed. These will help both the government and the people.
(Views are personal)
Gourav Vallabh | Professor of finance, XLRI, and BJP leader