UPS: An ‘improvement’ on NPS or a step back in pension reforms?

The Unified Pension Scheme draws flak from government employees and a studied silence from political parties.

Members of the East Central Railway Karamchari Union demanding the restoration of the Old Pension Scheme, in Patna on July 12. | Photo Credit: Pappi Sharma/ANI

On August 4, the Union Cabinet approved yet another modification to the National Pension System (NPS), the scheme applicable to 23 lakh Central government employees who joined service on January 1, 2004, or later. The NPS, which was earlier called the New Pension Scheme as it replaced the Old Pension Scheme (OPS), has also been adopted by most State governments and autonomous bodies receiving government funding. Employees under the NPS are now being offered the Unified Pension Scheme (UPS) as an “improvement” on the NPS, with the scheme coming into effect from April 1, 2025.

Those who joined before January 1, 2004, are covered under the OPS. The announcement came as a surprise because it was only in February that the Ministry of Personnel, Public Grievances and Pensions held a review meeting on the operationalisation of the NPS Oversight Mechanism, established in 2019. The government went out on a limb to defend the NPS and explain why the OPS was unviable. 

Within six months, everything seems to have changed. The employees’ demand to restore the OPS, combined with upcoming elections in three States and one Union Territory as well as byelections in Uttar Pradesh, appear to be the reason for the about turn. But the government is yet to notify it.

Last year, the non-BJP-led governments in Rajasthan, Himachal Pradesh, Chhattisgarh, Jharkhand, and Punjab informed the Central government and the Pension Fund Regulatory and Development Authority that they were reverting to the OPS. The Congress’ election manifesto for the Lok Sabha and Assembly elections clearly stated that the OPS would be restored.

Barring the BJP’s own affiliate mass organisations, there has been little or no support for the UPS. No political party has openly opposed it, but their trade union affiliates have. Large sections of employee associations are not in favour of the UPS, and that is one reason why the government, too, has been rather quiet after announcing the Cabinet decision.

NPS woes

Government employees had three main objections to the NPS: First, it was a contributory scheme, where the government transferred half the responsibility for funding their “pension” to the employees themselves; second, as a market-linked scheme, retirement benefits became subject to the vagaries of financial markets; and third, the investment of the corpus (or a part of it) in an annuity did not offer returns that were indexed to inflation.

According to employees’ organisations, the NPS did not offer financial security for old age. On its part, the Centre from time to time made modifications to the NPS aimed at increasing post-retirement benefits. For instance, the government contribution to the pension corpus was raised from 10 per cent of the salary of employees to 14 per cent, and death-cum-retirement gratuity was also made payable to those under the NPS.

In April 2023, the Centre set up a “Committee to Review the Pension System for Central Government Employees”, headed by Finance Secretary T.V. Somanathan. The UPS is supposed to be based on the recommendations of this committee, though its report has not been made public yet. The committee is supposed to have consulted State governments, representatives of employees, associations, the RBI, and others. Its recommendations were discussed with employee representatives through the national council of the Joint Consultative Machinery (JCM).

Prime Minister Narendra Modi meets a delegation from Joint Consultative machinery for central government employees, at his residence in New Delhi on August 24. | Photo Credit: PTI

Under the UPS, the government proposes to raise the employer’s contribution to 18.5 per cent and also offer a lump sum payment on retirement in addition to the gratuity. The key assurance is that the government will guarantee that the pension of an employee will be at least half the average salary in the last 12 months of service, subject to a minimum service of 25 years (with a proportionate reduction for those with a service duration between 10 and 25 years, subject to a minimum pension of Rs.10,000 a month). The UPS also offers a minimum family pension to the spouse of a deceased employee/pensioner. Besides, the assured minimum pension will be indexed to inflation by the provision of dearness relief.

Government employees do not appear to be satisfied with the UPS, though. Whether or not it will be an “improvement” on the NPS depends on the details, which are still under wraps. What is clear from what is available in the public domain is that employees’ contribution to their pension fund will remain. Moreover, the amount that can be withdrawn as a lump sum will be lower than even that under the NPS because the government will be splitting up its contribution of 18.5 per cent to the corpus. In the UPS, the government’s contribution will be only 10 per cent of the employees’ salary (as against 14 per cent in the NPS). The additional 8.5 per cent of the government’s contribution will be placed in “a separate pool corpus” and will not be part of the individual pension fund of the employee. The UPS also does not offer the possibility of pension increasing when pay scales of current employees are revised.

The new proposals will mean an additional expenditure annually for the government. Also, since the government has promised to make up any “shortfall” from the assured minimum pension in the annuity returns earned by individual pension funds, additional expenditure may be incurred unless the pool corpus earns enough to cover such a shortfall. These financial implications of the UPS have meant that many votaries of the NPS, who believed that the OPS was financially unsustainable, now see the UPS as a step back in pension reforms.

Some economists point out that it was the shift to the NPS in 2004 that contributed to increasing pension-related expenditures of governments. That shift had no implications for the expenditure on pensions of those who were pensioners then, those who have become since, and many of those who will become in the years to come (as long as they joined service before January 1, 2004).

On the other hand, virtually none of the 26 lakh employees (including employees of Central autonomous bodies) of the Central government Sector or the 66 lakh of the State government sector who came under the NPS have retired from service yet and many will not for years to come. Indeed, the first employees who could claim the minimum assured pension under the UPS will retire only in 2029. The government might have “saved” in terms of future pension payments of these employees, but in the past 20 years, it has had to spend an additional amount as its contribution to their pension funds. Had the OPS been retained, it would have had to pay only retired employees from its budgetary resources.

A senior representative of the All India Bank Officers’ Confederation said: “Our GDP is growing at a rate of 6-7 per cent as the government claims. On the other hand, the number of Central government employees is decreasing year on year. The load on the UPS has already come down. Pension is rarely updated, only DA is applied on it.” He added: “The government argues that the pension load has increased. The Rs.10,000 [minimum monthly pension] is coming from our own contribution. Under the Atal Pension Yojana for every citizen, people get Rs.5,000 by contributing. Under the UPS, the government says at least we will get Rs.10,000 if we contribute 10 per cent. It is a joke. It is not at all a unified scheme. It is a misnomer. At best, it can be called the Modi-fied NPS.”

He claimed that from what has been issued so far, the UPS is worse than the NPS. He explained: “We are saying that whatever we are contributing we should get back. What if the spouse is no more, what happens then? The contribution is gone. No lump sum is paid at the end of the scheme, and even when the person is superannuating, five to six months of salary will be given. In the OPS, one gets a lump sum or one can opt for commutation. Under the NPS, there is some assurance of a lump sum even though it is market linked. People can get good returns if the market performs well but there is no assurance.”

Rejecting claims that the Somanathan Committee had consulted representatives of employee associations and organisations, he said that only select trade unions and a few organisations representing employees were consulted. Neither the Finance Ministry, the Somanathan Committee, nor the Prime Minister had approached many of the organisations or different sectors. Even in the Central government, not all employee organisations were consulted, he said. “No one from the banking sector was invited for the consultations,” he added.

Prem Chand, general secretary of the Indian Public Service Employees’ Federation, expressed surprise that the Congress, having declared the restoration of the OPS, was now saying that it would take a decision after seeing the Somanathan Committee report. 

Prem Chand said that at least 10 organisations had decided, along with the leadership of the JCM, to make the restoration of OPS a national demand. But there was a lot of dilly-dallying by the JCM leadership. “We left the front and formed an Old Pension Restoration Front and finally a big rally was held in Delhi for the OPS on October 1, 2023. We have demanded that the Somanathan committee report be made public. So far, only portions have been leaked. The JCM is a 60-committee membership of which 26 are from the railways. It is not a democratic body even though it is a permanent negotiation mechanism. A full meeting of the JCM has also not been held. An internal committee was formed for consultations with the government,” he said.

Penny wise, pound foolish

According to information available in the annual reports of the Department of Personnel and Training, the number of pensioners of the Central government increased from around 37 lakh in 2005 to almost 54 lakh in 2013 and to over 69 lakh by 2022. The Central government expenditure on pensions, on the other hand, as revealed in the Union Budgets, increased almost 17 times, from around Rs.14,000 crore in 2002-03 (before the NPS) to nearly Rs.2,42,000 crore in 2022-23. This was despite the transition to the NPS. However, this was still less than 6 per cent of total Central government expenditure, and only a fraction of the country’s national income, said employees and dismissed the contention that the OPS was unsustainable.

Again, going by Union Budget figures, the establishment strength of the Central government (excluding defence personnel) was 33.17 lakh in 2003, but in 2023 it was just 31.67 lakh. The only component that has grown is the government’s police forces, whose strength has increased from 6.59 lakh to 10.45 lakh over the same period. In addition is the rise in the proportion of contractual employment, which creates no pension entitlements. The real question then is, What effect does the government’s attempts to reduce expenditure on its employees have on the quality of the services it provides? Even the strength of departments dealing with revenue mobilisation has been reduced. This, employees say, may be a case of the government being penny wise and pound foolish.