A balanced retreat
The introduction of the Unified Pension Scheme (UPS) by the government is a big deviation from the 21-year-old National Pension System (NPS). It signals a return to a more traditional pension model which is reminiscent of the Old Pension Scheme (OPS). It appears to be a response to the cumulative backlash by government employees over decades. The Atal Bihari Vajpayee government introduced the NPS in 2004 as a bold reform aimed at curbing the growing pension liabilities that had become a significant burden on the national exchequer. Under the NPS, pension payouts are directly linked to the contributions made by the employee and the government, which are invested in market-linked securities. This system, though seemingly less predictable, is designed to be fiscally prudent by reducing the government's immediate pension obligations.
However, the NPS has faced considerable opposition, particularly from government employees who feel that it does not offer the security and assurance provided under the OPS. The OPS, with its guarantee of 50 per cent of the last drawn salary as a monthly pension, provided a sense of stability and financial assurance that the NPS could not match. This sentiment has only grown stronger in recent years, with several opposition-ruled states opting to revert to the OPS—fuelling demands for a similar rollback at the Central level.
The UPS, approved by the Union Cabinet on August 24, 2024, appears to be a much-needed compromise between the two systems. As a matter of fact, it paves the ‘middle ground’, which is the need of the hour. It promises an assured pension of 50 per cent of the average basic pay received by the employee prior to retirement (for a service longer than 25 years), along with inflation-indexed dearness relief, a family pension, and a lumpsum payout at the time of retirement. The key difference, however, lies in the contributory nature of the UPS. While the OPS was entirely funded by the government, the UPS requires employees to contribute 10 per cent of their salary, with the government contributing 18.5 per cent. This contributory element, along with periodic actuarial assessments to adjust government contributions, is intended to ensure fiscal sustainability of the scheme. Despite this being a very pragmatic and well-balanced move, reactions to the UPS have been mixed. Certain sections of the employees’ community remain fixated on restoration of the OPS as the one and only solution.
The government, on the other hand, is duly concerned about fiscal prudence. The scheme is designed to avoid the long-term fiscal burden that plagued the OPS. It may be noted here that the announcement of UPS is no arbitrary move. It is based on the recommendations of a committee chaired by former Finance Secretary and Cabinet Secretary-designate TV Somanathan, which was set up in March 2023.
Since the state governments have been given the option to adopt the UPS, which could extend its benefits to millions of state government employees, it will be crucial to watch how they respond to the UPS. As things stand today, several non-BJP-ruled states have already gone for the OPS while many others have ratified the NPS. Away from political compulsions, states must go for the more pragmatic UPS, which will not only reduce fiscal burden but also bring a uniformity of sorts throughout the country. As far as employees are concerned, the Union government seems quite convinced about the attractiveness of the UPS, especially vis-Ã -vis the NPS. The announcement of the UPS is a significant opportunity to materialise the much-needed reforms in the pension system.
