TAG: GS 2: SOCIAL JUSTICE
THE CONTEXT: The Union Cabinet recently approved the Unified Pension Scheme (UPS), which will provide government employees with assured pension after retirement.
EXPLANATION:
- The scheme will be effective from April 1, 2025, according to the government’s announcement.
- Over the last few years, the political opposition has tapped into the unhappiness of government employees about the National Pension Scheme (NPS), which is popularly known as the new pension scheme.
- The Congress governments in Himachal Pradesh in 2023, and Rajasthan and Chhattisgarh in 2022, as well as the AAP government in Punjab (in 2022) have reverted to the Old Pension Scheme (OPS).
- The Cabinet’s announcement of a novel pension scheme is a major political signal ahead of the Assembly elections in Jammu & Kashmir, Haryana, Maharashtra, and Jharkhand.
What does the UPS entail?
- Most importantly, the UPS promises retirees a fixed pension, unlike the NPS. This was one of the major criticisms of the NPS.
- The UPS has five key features:
- Assured pension:
- This would amount to 50% of the employee’s average basic pay drawn over the last 12 months before superannuation for a minimum qualifying service of 25 years.
- The amount would proportionately go down for a smaller service period, up to a minimum of 10 years of service.
- Assured minimum pension:
- In the case of superannuation after a minimum 10 years of service, the UPS provides for an assured minimum pension of Rs 10,000 per month.
- Assured family pension:
- Upon a retiree’s death, their immediate family would be eligible for 60% of the pension last drawn by the retiree.
- Inflation indexation:
- Dearness relief will be available on these three kinds of pensions, which will be calculated based on the All India Consumer Price Index for Industrial Workers, as is the case with serving employees.
- Lumpsum payment at superannuation:
- This will be in addition to gratuity, and will be calculated as 1/10th of the monthly emolument (pay plus dearness allowance) on the date of superannuation for every six months of service completed.
- Assured pension:
What was the NPS, and why was it introduced?
- The NPS replaced the OPS on January 1, 2004 as part of the Centre’s effort to reform India’s pension policies.
- Those joining government service after this date were put under the NPS.
- Under the OPS, pension to government employees both at the Centre and the states was fixed at 50% of the last drawn basic pay, like it is in the proposed UPS.
- In addition, there was Dearness Relief calculated as a percentage of the basic salary to adjust for the increase in the cost of living.
- The NPS was introduced by the Atal Bihari Vajpayee government because of a fundamental problem with the OPS that it was unfunded, i.e., there was no corpus specifically for pension.
- Over time, this led to the government’s pension liability to balloon to fiscally unhealthy, if not unsustainable, levels.
- With better healthcare facilities leading to longer average lifespans, the OPS could not have continued in the long run.
- Data show that over the last three decades, the pension liabilities of the Centre and states have jumped manifold.
- In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and that of all states put together was Rs 3,131 crore.
- By 2020-21, the Centre’s pensions 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.
How does NPS work, and what was the basis for the opposition to it?
- The NPS was different from OPS in two fundamental ways.
- First, it did away with an assured pension.
- Second, it would be funded by the employee himself/ herself, along with a matching contribution by the government.
- The defined contribution comprised 10 per cent of the basic pay and dearness allowance by the employee and the government’s contribution of 14 per cent (now proposed to be increased to 18.5 per cent).
- Individuals under NPS can choose from a range of schemes from low risk to high risk, and pension fund managers promoted by public sector banks and financial institutions, as well as private companies.
- Schemes under the NPS are offered by nine pension fund managers sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max. The risk profiles of the schemes vary from ‘low’ to ‘very high’.
- For government employees, the NPS not only gave lower assured returns, it also implied employee contributions which was not the case with the OPS. This was what drove the opposition to the NPS.
- In the wake of persistent demands for a return to OPS, Prime Minister constituted a committee under the chairmanship of then Finance Secretary (and now Cabinet Secretary) T V Somanathan in 2023.
- This committee held more than 100 meetings with different organisations and states.
- The recommendations of this committee have now resulted in the announcement of the UPS.
Who can avail of the UPS?
- The UPS will be applicable to all those who have retired under the NPS from 2004 onwards.
- In their case (NPS retirees), they will get arrears adjusted with whatever they have already drawn under the NPS.
- Simply put, employees can still opt to remain under the NPS, but it is unlikely to be beneficial to them.
- However, an employee can only opt for once. once opted, the option can not be changed.
- Currently, the new scheme is for central government employees, but states can adopt it as well.
What about the fiscal concerns that had led the government to move away from the OPS two decades ago?
- The expenditure on arrears will be Rs 800 crore in the first year of implementation, and would cost the exchequer roughly Rs 6,250 crore.
- The UPS is more fiscally prudent.
- One, it remains in the same architecture of a contributory funded scheme. That is the critical difference.
- The OPS is an unfunded non-contributory scheme. The UPS is a funded contributory scheme.
- The only difference in the changes that are made today is to give an assurance and not leave things to vagaries of market forces.
- The structure of UPS has the best elements of both OPS and NPS.