Explained: What is United Pension Scheme, what are the five pillars and how is it different from NPS?

In a landmark decision, the Union Cabinet on Saturday approved the introduction of the Unified Pension Scheme (UPS), marking a significant reform in the pension system for government employees. The new scheme is set to replace the existing New Pension Scheme (NPS), which has faced criticism for its lack of guaranteed pension benefits, leaving many employees uncertain about their financial security post-retirement. The UPS is scheduled for implementation from April 1, 2025.

“There have been demands from government employees to reform NPS (New Pension Scheme)… PM Narendra Modi formed a committee in April 2023 on this under T V Somanathan (who was then finance secretary)… After extensive consultations and discussions, including with the JCM (Joint Consultative Mechanism), the committee has recommended the Unified Pension Scheme. Today, the Union Cabinet has approved the scheme," said Information & Broadcasting Minister Ashwini Vaishnaw.

Background and rationale

The New Pension Scheme (NPS), introduced in the early 2000s, was designed as a contributory pension scheme for government employees. However, it did not offer a guaranteed pension amount, leading to widespread concerns among employees about the adequacy of their retirement income. Over the years, government employees have voiced their demands for a more secure and predictable pension system.

Recognizing these concerns, Prime Minister Narendra Modi constituted a high-level committee in April 2023 under the leadership of Cabinet Secretary TV Somanathan. The committee was tasked with reviewing the NPS and recommending necessary reforms. The committee engaged in extensive consultations, holding over 100 meetings with various stakeholders, including government organizations, state governments, and financial institutions such as the Reserve Bank of India and the World Bank.

What is United Pension Scheme?

The Unified Pension Scheme (UPS) is the newest retirement plan for government employees, offering a fixed, guaranteed pension unlike the New Pension Scheme (NPS), which does not ensure a set pension amount.

The UPS is structured around five key pillars:

1. Assured Pension:
One of the central features of the UPS is the introduction of an assured pension. Under the new scheme, retirees will receive a pension amounting to 50% of their average basic pay drawn during the last 12 months of service prior to superannuation. This benefit applies to employees who have completed a minimum of 25 years of service. For those with 10 to 25 years of service, the pension will be proportionate to the length of service.

2. Assured Family Pension:
The scheme also includes a provision for an assured family pension. In the unfortunate event of an employee's demise, their family will receive 60% of the pension the employee was receiving immediately before their death. This measure is designed to ensure continued financial security for the employee’s dependents.

3. Assured Minimum Pension:
To address the needs of employees with lower pay scales, the UPS guarantees a minimum pension of ₹10,000 per month, provided the employee has completed at least 10 years of service. This provision serves as a safety net against inflation and financial uncertainties after retirement.

4. Inflation Indexation:
The UPS introduces a mechanism for inflation indexation, which will adjust the assured pension, assured family pension, and assured minimum pension in line with inflation rates. This feature is aimed at preserving the real value of pension benefits over time.

5. Gratuity Benefits:
In addition to pension benefits, the UPS provides for a lump-sum gratuity payment upon superannuation. Employees will receive a gratuity amount equivalent to 1/10th of their monthly emoluments (basic pay plus dearness allowance) for every completed six months of service. This gratuity payment will not reduce the quantum of the assured pension.

Also read: PM Modi hails Unified Pension Scheme as assurance of dignity and financial security for government employees

Implementation and eligibility

The UPS will be implemented from April 1, 2025, and will apply to all central government employees. During a media briefing on Saturday, Union Minister Ashwini Vaishnaw emphasized that employees currently under the NPS will have the option to either continue with the NPS or switch to the UPS.

The scheme will also be extended to those who have already retired under the NPS since its inception in 2004. Retirees will be eligible for all the benefits under the UPS, with arrears being paid after adjusting any amounts they have already withdrawn.

Cabinet Secretary Designate T V Somanathan also said, “This will also apply to all those who have already retired under the NPS from 2004 onwards. Though the new scheme will take effect from April 1, 2025, everybody who has retired under NPS from the time of its inception and also including those retiring till March 31, 2025, will also be eligible for all these five benefits of the UPS. They will get arrears of the past after adjusting whatever they have withdrawn.”

What is NPS?

 

Introduced in January 2004, the National Pension Scheme (NPS) initially catered exclusively to government employees. However, it was expanded in 2009 to include participants from all sectors.

The NPS is managed by both the government and the Pension Fund Regulatory and Development Authority (PFRDA). It is a long-term, voluntary investment program designed for retirement planning, offering the potential for significant investment returns.

Subscribers to the NPS can withdraw a portion of their accumulated corpus upon retirement, with the remainder providing a regular monthly income. This approach ensures a consistent income stream during retirement.

The NPS is divided into two tiers: Tier 1 and Tier 2 accounts. Tier 1 accounts restrict withdrawals to retirement, whereas Tier 2 accounts permit early withdrawals.

Investments in the NPS benefit from tax advantages under Section 80 CCD of the Income Tax Act, allowing for deductions of up to Rs 1.5 lakh. Additionally, withdrawing 60 percent of the NPS corpus is tax-free, making it an attractive option for retirement planning with the potential for a lump sum payout.

How is NPS different from Old Pension Scheme (OPS)

The National Pension Scheme (NPS) replaced the old pension scheme, known as the Defined Benefit Pension System (DBPS). Under the DBPS, pensions were calculated based on the last pay drawn by the employee. In contrast, the NPS operates as a Defined Contribution Pension System (DCPS), where both the employer and employee make contributions to accumulate a pension fund, which is then payable at retirement either as an annuity or lump sum according to the scheme's rules.

Under the previous OPS, retirees could receive a pension amounting to 50 percent of their last-drawn salary. The NPS, however, allows individuals to withdraw up to 60 percent of their accumulated corpus tax-free at retirement. The remaining 40 percent is used to purchase an annuity, which currently provides a pension equivalent to approximately 35 percent of the last-drawn salary.

The NPS applies to all employees joining the central government services, including central autonomous bodies (excluding the Armed Forces), on or after January 1, 2004. Many state governments have also adopted the NPS framework and mandated its implementation for employees joining from a specified date.

The Union Cabinet’s approval of the Unified Pension Scheme is a major step towards enhancing the financial security of government employees post-retirement. By addressing the concerns associated with the NPS and introducing guaranteed pension benefits, the UPS is expected to provide a more stable and predictable retirement income for millions of government employees. As the government prepares for its implementation in 2025, the UPS is poised to become a cornerstone of India’s public sector pension system, reflecting a balance between security and sustainability.