Assured pension the hallmark of the Unified Pension Scheme

Under the new scheme, retirees will receive a pension amounting to 50 per cent of their average basic pay from the last 12 months of service before the superannuation

On Saturday, the central government approved Unified Pension Scheme, which was in works for some time. Ever since the introduction of National Pension Scheme (NPS) about two decades ago, there has been growing concern on certain aspects of the scheme particularly related to the assured pension. This lack of guaranteed nature has left many employees uncertain about their financial security post-retirement.

A committee was formed by the finance ministry in 2023, to address the various concerns in the existing NPS to the central government employees, which held over 100 meetings with different stakeholders and with almost all States. And as per the Union Minister Ashwini Vaishnaw, following extensive consultations with everyone including the Reserve Bank of India (RBI) and World Bank, the committee proposed the Unified Pension Scheme (UPS).

The scheme was based on five important pillars, as outlined by the cabinet minister. The first and important pillar is the assured pension. This was one of the key implementation changes from the existing pension scheme. Under the new scheme, retirees will receive a pension amounting to 50 per cent of their average basic pay from the last 12 months of service before the superannuation. This benefit is applicable to those employees who have completed a minimum of 25 years of service. For those with less than 25 years but more than 10 years of service, the pension will be proportionate to the length of service. The second pillar is the assured family pension. This provision would ensure financial stability to the employee’s family. In the unfortunate event of the demise of the employee, their family will receive a pension amounting to 60 per cent of the pension of employee would’ve received immediately before their death.

The new scheme also proposes an assured minimum pension, forming the third pillar. This is significant boost for those employees working with lower pay scales, providing them a good safety net. The scheme guarantees a minimum of Rs. 10,000 per month, provided the employee has served for at least 10 years.

The new scheme also provides a lumpsum payment at the time of superannuation. This is in addition to the gratuity received by the retiring employee. This payment will be one-tenth (or 10 per cent) of the employee’s monthly emoluments (including pay and dearness allowance) as on the date of the retirement, for every completed six months of service. This lump sum payment will not, however, have any impact or reduction in the quantum of the assured pension.

The inflation indexation benefit is the fifth pillar of the new scheme. Both the assured pension and the family pension are subject to inflation indexation. That allows the pensions to keep pace with the inflation, making them realistic all through the lifetime. Another addition is that retirees under the new scheme will receive dearness relief based on the All India Consumer Price Index for Industrial Workers (AICPI-IW). The new scheme, which is effective 1st April 2025, could impact about 23 lakh government employees. All those who retired (through NPS) or retiring up till 31st March 2025 with arrears are eligible. State governments are open to adopt the architecture of the UPS with the key difference between the Old Pension Scheme (OPS, prior to 2004) and the UPS being that the OPS liabilities are unfunded and entailed no contributions from employees or employer. The UPS will be a contributory scheme, with employees’ providing 10 per cent of salary and the government contributing 18.5 per cent of the salary. While the scheme proposed has frozen the 10 per cent threshold for the employee contribution, the government’s contribution could be adjusted higher or lower depending on the periodic actuarial assessment.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])