Unified Pension Scheme (UPS), Is Government Announcement is a Mixture of NPS and OPS?

In the UPS, averaging over 12 months reduces the benefit of any recent promotion, whereas in the OPS, the pension directly reflects the highest recent pay
Basic_Pension_under_UPS_and_OPS
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Overview of the Unified Pension Scheme (UPS)

The Unified Pension Scheme (UPS) was announced by the Central Government on August 24, 2024, and will take effect from April 1, 2025. The UPS aims to combine elements of the National Pension Scheme (NPS) and the Old Pension Scheme (OPS) to create a new, unified pension plan for government employees. The government positions the UPS as a beneficial initiative for 23 lakh Central Government employees, with the potential to cover up to 90 lakh employees if state governments, many of which are already under the NPS since January 1, 2004, also adopt it. Maharashtra was the first state to express interest in implementing the UPS for its employees shortly after its introduction.

What is the Unified Pension Scheme?

The Unified Pension Scheme (UPS) is a new pension plan introduced by the NDA-led central government as an alternative to the National Pension System (NPS). Initially, the government replaced the Old Pension Scheme (OPS) with NPS, which led to dissatisfaction due to the lack of assured benefits and market-linked returns.

To address these concerns, UPS was introduced, allowing current NPS employees to switch to UPS, though this switch is irreversible. Under UPS, employees contribute 10% of their basic pay and DA, while the government increases its contribution to 18.5%, with an additional 8.5% going to a separate pooled fund from April 1, 2025. The scheme promises a pension of 50% of the average basic pay of the last 12 months before retirement for those with at least 25 years of service.

However, skepticism remains due to the irreversibility of the switch, partial assurance of benefits, and concerns about the long-term sustainability and effective implementation of the scheme. The introduction of UPS coincides with upcoming elections and pressure from employee unions, reflecting a strategic effort by the government to regain support and approval.

There are reasons why UPS might still not fully satisfy employees and may raise questions:

  • Irreversibility of the Switch:
    Once employees opt for UPS, the switch is irreversible. This lack of flexibility may deter employees who are cautious about committing to a new system without the option to return to NPS.
  • Partial Assurance:
    While UPS guarantees a pension equal to 50% of the average basic pay of the last 12 months before retirement, it still requires a long service period of at least 25 years to be eligible. Employees with shorter service durations may feel left out.
  • Contribution Requirements:
    Employees under UPS still need to contribute 10% of their basic pay and DA, which some might find burdensome compared to OPS, which required no employee contributions.
  • Dependence on Effective Implementation:
    The success of UPS largely depends on its implementation. If not managed well, the scheme could face issues like delays in payouts, administrative hurdles, or unclear communication, leading to further dissatisfaction.
  • Skepticism Due to Past Experiences:
    Given that the government initially replaced OPS with NPS and later had to introduce UPS due to dissatisfaction, employees might be skeptical about the stability and reliability of the government’s pension policies.
  • Uncertain Long-term Benefits:
    Employees may question the long-term sustainability and security of UPS, especially given the economic fluctuations and changes in government policies.
  • Pooled Fund Allocation Concerns:
    The additional 8.5% contribution to a separate pooled fund might raise concerns about transparency and the management of these funds, adding to doubts about whether the promised benefits will be consistently delivered.

However, the success of the scheme will largely depend on its effective implementation. Central trade unions and employee unions have expressed mixed reactions to the Unified Pension Scheme (UPS) and are awaiting further notification for clarity on specific details, tax implications, benefits etc..

Concerns and Comparisons with NPS and OPS

One major concern is whether the NPS deductions will continue alongside the UPS. If NPS contributions remain in place, employees may not see a reduction in their overall contribution levels, which could continue until retirement. This situation raises questions about the true differences between the UPS and NPS and whether UPS offers any genuine relief or additional benefits to employees.

When comparing UPS with OPS, the UPS promises a guaranteed pension similar to OPS—50% of the average basic pay over the last 12 months before retirement. However, the methods for calculating pensions differ between the two schemes. The comparison table below illustrates the potential pension benefits under both UPS and OPS, highlighting the key differences.

Pension Scheme Comparison: UPS vs. OPS

Sr.no.Month-YearBasic Pay under (UPS)Basic Pay under (OPS)
1February-202464,100Pension
2March-202464,100clculated
3April-202464,100only
4May-202464,100on
5June-202464,100the
6July-202464,100last
7August-202464,100basic
8September-202464,100pay
9October-202464,100drawn on
10November-202464,100retirement
11December-202464,100month
12January-202568,00068,000
Grand Total 12 months7,73,100/12 = 64,425calculated only for January-2025
By countLen team/under the UPS pension calculated on the 12 months total average while in the OPS only the last basic pay of January-2025

Based on the table of an employee’s basic pay over the last 12 months before retirement on January 31, 2025, the basic pay was ₹64,100 per month, which increased to ₹68,000 in January 2025 due to a promotion.

Under the Unified Pension Scheme (UPS): The pension is calculated based on the average basic pay of the last 12 months, which is ₹64,425 (7,73,100/12) in this case. This average calculation results in a lower pension amount because the higher pay only applies for the final month.

Under the Old Pension Scheme (OPS): The pension is calculated based on the last drawn basic pay, which was ₹68,000. This results in a higher pension amount under OPS as it directly benefits from the higher last drawn salary.

In the UPS, averaging over 12 months reduces the benefit of any recent promotion, whereas in the OPS, the pension directly reflects the highest recent pay, thus providing a higher benefit.

RemarksUPSOPSNPS
Last Basic Pay Drawn68,00068,000—-
Grand total of last 12 months Basic Pay7,73,100not required—-
Average of the last 12 months Basic Pay64,42568,000—-
Basic Pension as UPS32,21334,000—-
DA @50%16,10617,000—-
FMA1,000—-
Total Pension per month48,31952,000—-
Family Pension19,32817,000—-
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Concerns About Employee Contributions

There are concerns that while the government has increased its contribution from 14% to 18.5%, employee contributions continue as before. Since all contributions are managed by the government, there are questions about what happens to these funds if an employee passes away. The accumulated contributions may not directly benefit the employee or their family, raising doubts about the scheme’s fairness and transparency.

Employees are worried that their contributions might be absorbed by the government without clear returns. The fundamental issue is whether the scheme is genuinely designed to support employees and their families or if it serves primarily to enhance the government’s financial position. However, the scheme’s success will depend significantly on how well it is implemented.

Five Key Features of the Unified Pension Scheme (UPS)

  • Assured Pension: Employees receive a pension of 50% of their average basic pay over the last 12 months before retirement if they have completed at least 25 years of service.
  • Family Pension: Upon the death of the subscriber, a family member will receive 60% of the pension amount that the subscriber was receiving.
  • Minimum Pension Package: Employees who have completed at least 10 years of service are guaranteed a minimum pension of ₹10,000 per month.
  • Inflation Indexation (AICPI-IW): Pensions are adjusted regularly to match inflation and changes in the cost of living, maintaining their value and purchasing power.
  • Gratuity: Upon retirement, employees receive a lump-sum gratuity payment, calculated as 1/10 of their monthly emoluments (Basic Pay + DA) as of the superannuation date for every six months of completed service.

Five Key Features of the National Pension Scheme (NPS) vs Unified Pension Scheme (UPS)

  • Flexibility in NPS: The NPS offers flexibility by allowing adjustments in equity exposure, extending the accumulation phase up to age 70, and initiating systematic withdrawal plans (SWP) for tailored retirement income. UPS lacks these flexible options.
  • Investment Management and Control: NPS provides a choice of fund managers and asset classes, offering greater control over investments. The UPS does not offer this level of control, limiting employee options.
  • Taxation Differences: Under the NPS, 60% of the corpus is tax-free upon retirement, while the remaining 40% is used to purchase a taxable annuity. The tax treatment of UPS payouts, including pensions and lump sums, is still unclear.
  • Financial Implications and Political Context: The UPS was introduced ahead of key state elections and amid some states reverting to the OPS. The UPS aims to address concerns with NPS payouts but involves significant additional costs for the government.
  • Sustainability and Market Protection: The UPS offers a stable pension by protecting employees from market fluctuations but pools all contributions, including employee shares. This raises concerns about ownership and potential government control over these funds, unlike the NPS, which allows for equity investments.
YOU MUST KNOW?

NPS Fund Management: How Your Contributions Are Invested

Under the National Pension System (NPS), employees have the flexibility to invest their accumulating retirement savings, known as the corpus, by selecting from a variety of pension fund schemes. These schemes offer different investment strategies, allowing employees to tailor their investments according to their risk appetite and financial goals.

The funds are managed by 11 pension fund managers, a mix of government and privately-owned entities, including well-known financial institutions like the State Bank of India (SBI), Life Insurance Corporation (LIC), Unit Trust of India, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, Max, Axis, and DSP. These managers are responsible for investing the contributions in various asset classes such as equities, government securities, and corporate bonds.

The entire system is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which ensures that the funds are managed prudently and transparently. This regulatory oversight aims to protect the interests of the subscribers by maintaining stringent guidelines for fund management, thereby providing employees with a secure and controlled environment to grow their retirement savings over time.

This structure gives NPS participants a degree of control over their investments, allowing them to adjust their portfolios based on their changing needs and market conditions, unlike some other pension schemes which offer limited or no investment flexibility.

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CountLen Team
CountLen Team

CountLen Team is known for making complex topics accessible. Aiming to bridge the Excel and Google Sheets knowledge gap.

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