New Delhi: Is the Unified Pension Scheme or UPS for federal employees, approved by the cabinet on Saturday, a return to the fiscally straining old pension system or OPS, since retirement benefits in the two systems are similar? The short answer is “no”.
The key difference between the OPS and the UPS, which will take effect from April 1, 2025, is that the older scheme was an unfunded one, while both the UPS and the current New Pension Scheme or NPS are fully funded pension schemes.
A funded pension scheme is one that is designed to meet current and future financial obligations based on the retirement fund’s returns over investments. Funding is also ensured through compulsory contributions from the employee and the employer, and through annual on-budget allocations.
A majority of central government employees are expected to switch from the NPS to the UPS, as the latter will guarantee 50% of average base pay of the past 12 months as a monthly pension to those who have served for 25 years, a key demand of staff unions.
Since the NPS was fully funded – its corpus was mainly invested in federal debt – its pensions were linked to market returns, without any guaranteed payout, a major demand of federal employees.
The OPS, scrapped in 2004, too handed out a monthly pension equivalent to half of an employee’s base pay for those serving a minimum of 20 years. Just as in the OPS, the UPS will offer a lump sum payment upon retirement on top of gratuity.
While the OPS guaranteed a fixed pension of 50% of base salary, employees were not required to contribute anything from their salaries towards pension benefits. This made the OPS fiscally untenable, as pension liabilities soared.
The current NPS was implemented in 2004 as a major fiscal reform as debts were piling, especially of states, from an unfunded pension system. Under the NPS, the government’s share in total contribution stood at 14%, while employees had to pay 10% of their emoluments. Under the UPS unveiled on Saturday, the government’s contribution will be 18.5%, while employees will contribute 10%. The higher government contribution is the key reason why the government will be able to offer an assured amount.
Since OPS was an unfunded system, pension liabilities of state governments over the long term had showed a sharp unsustainable jump, said Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, the country’s largest lender. In 2023-24, India’s federal pension budget was ₹2.34 lakh crore. The compound annual growth in pension liabilities for the 12-year period ended 2021-22 was 34% for all state governments. As of 2020-21, the pension outgo as a percentage of revenue receipts stood at 13.2%, Ghosh said.
“With unfunded systems, there is a global concern about intergenerational inequities,” said Robin Taldi, a labour economist with the Indian Statistical Institute. Intergenerational inequity could occur if younger and future generations were forced to bear excess financial burdens arising from decisions made by the preceding generations. Pension liabilities are one such burden.
