IN August 2024, the central cabinet approved a Unified Pension Scheme (UPS). The Centre of Indian Trade Unions (CITU) labelled it a "deceptive scheme," a characterisation that proved true when the scheme was gazetted on January 25, 2025, and draft regulations were published on January 27, 2025. The government claimed there was consensus among the Joint Consultative Machinery (JCM) unions on the UPS. However, the All India Defence Employees' Federation (AIDEF) boycotted the prime minister's meeting on August 24, 2024, in opposition to the UPS. Subsequently, JCM unions, in their proposal for the terms of reference to the 8th Central Pay Commission (CPC), opposed both the National Pension System (NPS) and the UPS, demanding a return to the Old Pension Scheme (OPS). There are compelling reasons to oppose the UPS.

When the cabinet decision was announced, it was stated that the UPS would provide assured 50 per cent pension for 25 years of service based on the last 12 months' pay, proportionate pension for service above 10 years, family pension at 60 per cent of the assured pension, a minimum pension guarantee of Rs 10,000, dearness relief akin to serving employees, a lump sum payment of 10 per cent of pay plus DA for every six months of service, gratuity, and an increase in the government's contribution from 14 per cent to 18.5 per cent. However, the subsequent notification and regulations revealed the scheme's deceptive nature. The fact that the scheme is fully funded and aims to prevent fiscal hardship for future generations indicates that the government will bear no expenditure for it. Retirees or their families will not receive a traditional pension but rather a "Pay Out." 

Under the NPS, employees contribute 10 per cent of their basic pay and dearness allowance, while the government contributes 14 per cent. Both amounts are invested in the market, with no implicit or explicit assurance of benefits, as outlined in Section 20(g) of the PFRDA Act, 2013, which includes the risk of principal loss. The combined 24 per cent contribution and any returns form the pension wealth. At retirement, if the market performs well, the retiree can withdraw 60 per cent of the pension wealth, while the remaining 40 per cent must be used to purchase an annuity. However, the annuity is often inadequate, lacks dearness relief, does not allow for pension commutation, provides no additional pension after 80 years, and is not revised post-pay commission, making it inferior to the OPS. Upon the death of both the retiree and their spouse, the remaining 40 per cent is returned to the nominee, ensuring the entire pension wealth is eventually returned to the subscriber's family.   

Under the UPS, the employee contribution remains at 10 per cent, but the employer's contribution is reduced to 1010 per cent from 1410 per cent. The total 2010 per cent is invested in the market, with the risk of principal loss. Any returns form the Individual Corpus (IC). The scheme offers default investment options prescribed by the PFRDA, as well as individual choices. Employees can withdraw from their contributions up to three times during their service. These provisions further highlight the shortcomings of the UPS, reinforcing the opposition to it.

The government will contribute 8.5 per cent under the scheme, and employees will have their own investment options. This portion is referred to as the Pool Corpus (PC). Additionally, the notification introduced a Benchmark Corpus (BC), an amount determined by the PFRDA. The BC is calculated based on hypothetical scenarios: if an employee had contributed to their Individual Corpus (IC) without default (due to absences, removal from service, or subsequent reinstatement), had not withdrawn from the IC, and had invested in the default scheme, the resulting corpus would be considered the BC. This arbitrary calculation raises concerns.

The retiree's payment, termed Assured Pay Out, is contingent on completing the prescribed retirement age, typically 60 years (the age of superannuation). Under the Old Pension Scheme (OPS), central government employees with 10 years of service at superannuation or 20 years of service on voluntary retirement were entitled to 50 per cent of their last month's pay as pension. However, under the Unified Pension Scheme (UPS), retirees must have 25 years of service, with any service beyond this ignored. Even then, the average of their last 12 months' pay and 25 years of service may not suffice to guarantee 50 per cent of their pay as Assured Pay Out.

To qualify for the full 50 per cent Assured Pay Out, the retiree's Individual Corpus (IC) must equal the Benchmark Corpus (BC). If the IC is less than the BC, the retiree must pay the difference to recoup the IC. Additionally, the retiree must agree to transfer 100 per cent of their IC to the Pool Corpus (PC), which will not be returned to the retiree or their nominee. This transfer is a permanent loss. Only if these conditions are met will the retiree receive 50 per cent of their pay as Assured Pay Out. If the IC is only 80 per cent of the BC, the retiree will receive only 80 per cent of the 50 per cent Assured Pay Out, i.e., 40 per cent of their pay. The pay-out is proportionately reduced based on the percentage of the IC relative to the BC. In extreme cases, such as during a market crash like the subprime crisis, if the IC falls to zero, the pay-out will also be zero. Only retirees with an IC equal to the BC and who agree to transfer 100 per cent of their IC to the PC are guaranteed the minimum pension of Rs 10,000. Otherwise, the retiree may receive less than Rs 10,000, depending on the calculations.

Retirees are allowed a lump sum withdrawal of up to 60 per cent of their IC. However, in such cases, the Assured Pay Out is reduced by 60 per cent, and only 40 per cent of the pay-out is provided, termed the Admissible Pay Out. Importantly, the minimum pension guarantee of Rs 10,000 does not apply in this scenario.

Further, the pay-out is reduced proportionately based on the number of years of service. This means that even if a retiree meets all other conditions, their pay out may still be diminished if their service period is less than the prescribed 25 years. These provisions highlight the complexities and potential pitfalls of the UPS, further fuelling opposition to the scheme.

The Pool Corpus (PC) will be utilised to cover any shortfall in the Assured Pay Out. It will also be used to provide pay-outs to those who retired under the National Pension System (NPS) until March 31, 2025.

The minimum years of service required to be eligible for the pay-out is 10 years. However, the fate of the corpus for employees who retire with less than 10 years of service is not clearly defined. Similarly, employees who are removed, dismissed, or compulsorily retired as a punishment are not entitled to the Assured Pay Out, and the regulations do not specify what happens to their corpus.

Employees who superannuate after 10 years of qualifying service or those who take premature retirement in the public interest are eligible for the Unified Pension Scheme (UPS). The family pay-out is set at 60 per cent of the admissible pay out, but the minimum pension guarantee of Rs 10,000 does not apply to this. The family pay-out is available only to the legally wedded spouse at the time of superannuation. Unlike the Old Pension Scheme (OPS), the family pay-out cannot be claimed if the surviving spouse remarries after the death of the retiree.

The provisions for voluntary retirement under the UPS are particularly restrictive. An employee can opt for voluntary retirement only after completing 25 years of service, unlike the 20 years required under the OPS. However, the retiree can only receive the pay-out upon reaching the superannuation age. For example, an employee who joins service at 21 and voluntarily retires at 46 will have to wait until the age of 60 (14 years later) to receive the pay-out, making the provision impractical.

Many assumed that the Dearness Allowance (DA) or Dearness Relief (DR) announced by the central government would also apply to UPS beneficiaries. As of January 1, 2025, the DA/DR is set to reach 55 per cent. However, this will not apply to UPS beneficiaries. According to Chapter VII of the Regulations, the National Pension System Trust (NPST) will issue periodic instructions to the Central Record Keeping Agency (CRA) to release the applicable Dearness Relief. The CRA's responsibility is to disburse DR to UPS beneficiaries and maintain records of its application to the Assured Pay Out. A new DR base will be established, starting from 0 per cent, based on the 12-month average of the 2016=100 base indices in 2024, which stands at 141.58.

UNCERTAINTY REGARDING

ADDITIONAL BENEFITS

A significant question remains whether benefits such as family pension, death gratuity under pension rules for deceased employees, and invalid pension and service gratuity for invalidated employees – available under the NPS – will also be available to those opting for the UPS. Neither the notification nor the regulations provide clarity on this matter.

However, Paragraph 11 of the notification states:
"For the sake of clarity, it is made clear that any employee who has exercised the Unified Pension Scheme option under the National Pension System under this notification shall not be entitled to, and cannot claim, any other policy concession, policy change, financial benefit, or any parity with subsequent retirees, including post-retirement benefits."

This raises doubts about whether the aforementioned benefits under pension rules for deceased and invalidated employees in the NPS will be extended to UPS beneficiaries.

In the press release on August 24, it was stated that a lump sum payment would be provided in addition to gratuity. However, this benefit is conspicuously absent in the notification or regulations. This raises the question of whether the lump sum payment is also categorised under "other policy concessions," which employees are barred from claiming under Paragraph 11 of the notification.

All employees entitled to the Assured Pay Out are also eligible for a lump sum amount calculated as 10 per cent of pay plus DA for every six months of service. For 25 years of service, this amounts to five months' pay. While this may seem like a benefit, it is essentially a "worm in the fishhook" – a seemingly attractive offer that masks the scheme's shortcomings.

Examples of Pay-Out Calculations

Example I

·         12-month average pay: Rs 45,000

·         Service: 25 years (300 months)

o    300 ÷ 300 = 1

·         Individual Corpus (IC): Rs 25,00,000

·         Benchmark Corpus (BC): Rs 25,00,000

o    25,00,000 ÷ 25,00,000 = 1

·         Assured Pay Out: (45,000 ÷ 2) × 1 × 1 = Rs 22,500

·         IC transferred to Pool Corpus (PC): Rs 25,00,000

·         Family Pay Out: 60% of 22,500 = Rs 13,500

Example II

·         IC: Rs 20,00,000

·         BC: R. 25,00,000

·         IC transferred to PC: Rs 20,00,000

·         Assured Pay Out: 80% of 22,500 = Rs 18,000

·         Family Pay Out: 60% of 18,000 = Rs 10,800

Example III

·         IC/BC: Rs 25,00,000

·         Lump Sum Withdrawal: 60% of IC = Rs 15,00,000 (taken by retiree)

·         Remaining IC transferred to PC: Rs 10,00,000

·         Admissible Pay Out: 40% of 22,500 = Rs 9,000

o    No minimum pension guarantee of Rs 10,000

·         Family Pay Out: 60% of 9,000 = Rs 5,400

o    No minimum pay out guarantee for family

Example IV A

·         Service: 10 years (120 months out of 300) = 6/15

·         IC/BC: Rs 25,00,000

·         IC transferred to PC: Rs 25,00,000

·         Assured Pay Out: (6/15 × 22,500) = Rs 9,000

o    Minimum pension of Rs 10,000 guaranteed (since 100% of IC is transferred to PC)

·         Family Pay Out: 60% of 10,000 = Rs 6,000

o    No minimum guarantee for family pay out, even with full IC transfer

Example IV B

·         IC: Rs 20,00,000 (80% of BC)

·         IC transferred to PC: Rs 20,00,000

·         Assured Pay Out: 80% of 9,000 = Rs 7,200

o    No minimum pension guarantee (since IC < BC)

·         Family Pay Out: 60% of 7,200 = Rs 4,320

Example IV C

·         IC/BC: Rs 25,00,000

·         Lump Sum Withdrawal: 60% of IC = Rs 15,00,000 (taken by retiree)

·         Remaining IC transferred to PC: Rs 10,00,000

·         Assured Pay Out: 40% of 9,000 = Rs 3,600

o    No minimum pension guarantee

·         Family Pay Out: 60% of 3,600 = Rs 2,160

KEY ISSUES WITH UPS

1.      Dearness Relief (DR): Despite the central government's DA/DR reaching 55 per cent as of January 1, 2025, UPS beneficiaries will receive zero DR. A new DR base will be established, starting from 0 per cent, based on the 2016=100 index average of 141.58 in 2024.

2.      Inadequate Pension: The UPS does not provide 50 per cent pension for 10 years of service, unlike the OPS. The pension amount is linked to the Individual Corpus transferred to the Pool Corpus, making it unpredictable and unreliable.

3.      Family Pension Limitations: The family pay-out is limited to the legally wedded spouse at the time of superannuation and does not extend to unmarried, divorced, or widowed daughters or disabled sons.

4.      No Guarantees: There is no guarantee of pension, similar to the annuity in NPS. The minimum pension in the central government is Rs 15,950 as of January 1, 2025, while UPS beneficiaries may receive as little as Rs 2,160 with zero DR.

5.      Exclusion of Benefits: Benefits such as commutation, additional pension after 80 years, pension revision after pay commissions, death gratuity, and invalid pension are denied under UPS.

OPTIONS

·         Employees as of April 1, 2025, must submit Form A2 to opt for UPS. Those who do not opt for UPS will remain in NPS and continue fighting for the restoration of OPS.

·         New recruits from April 1, 2025, must choose between NPS and UPS by submitting Form A1.

·         The All India Defence Employees' Federation (AIDEF) has decided not to opt for UPS and will continue its struggle against both NPS and UPS.

The notification allows states to implement UPS for their employees. As of February 28, 2025, there are 27,14,418 central government employees and 69,94,167 state government employees in NPS, with an additional 6,14,000 employees from Tamil Nadu (not under PFRDA). Together, this represents a pension wealth of Rs 11.33 lakh crores under Assets Under Management (AUM). The government's push for UPS appears to be an attempt to leverage this vast sum for market investments under the guise of providing an "assured pay out."

Central and state government employees, totalling 1.03 crore, must unite to oppose the deceptive UPS and NPS schemes. The fight for the restoration of the Old Pension Scheme (OPS) must continue to ensure financial security and dignity for all government employees.