New Guaranteed Pension Scheme Receives Tepid Initial Response

The Government of India introduced the Unified Pension Scheme (UPS) as a middle path between the traditional Old Pension Scheme (OPS) and the National Pension System (NPS). While the promise of a guaranteed pension—equivalent to 50% of the last 12 months’ average basic pay—is central to UPS, the response so far has been lukewarm. As of mid-April, only about 1,500 central government employees, or a mere 0.05% of the 2.7 million staff enrolled in NPS since 2004, have opted for UPS.

What is the Unified Pension Scheme?

Unveiled to address long-standing employee demands for pension certainty, UPS introduces defined benefit elements into what had become a defined contribution retirement ecosystem under NPS. Key features include:

• Guaranteed monthly pension of 50% of the last 12 months’ average basic pay for those with at least 25 years of service.

• Full inflation indexation of pension benefits.

• A survivor benefit that pays 60% of the pension to the spouse after the pensioner’s death.

• A minimum pension of ₹10,000 per month for those who have completed at least 10 years of service.

Limited Adoption So Far

Despite these seemingly attractive benefits, UPS has had a tepid reception. Just over 1,500 employees have switched from NPS in the first two weeks since the scheme became available on 1 April. However, the decision window remains open till 30 June, and the timeline could be extended if needed.

Major Points of Comparison: UPS vs NPS

1. Contribution Structure

• Employee Contribution: Remains the same at 10% of basic pay + DA in both NPS and UPS.

• Government Contribution:
  • NPS: 14%

  • UPS: 18.5% (10% to the individual account and 8.5% to a common pool corpus)

2. Pension Flexibility

• NPS offers options with or without the return of purchase price during annuity selection.

• UPS has no capital return option and provides a joint life annuity that ends upon the dependent’s death.

3. Pension Corpus Allocation

Under UPS:

• The 20% contribution (employee + government) goes into the individual pension fund.

• The additional 8.5% government contribution forms a common pool to cover any shortfall in paying the guaranteed pension.

Withdrawal and Pension Implications

In UPS, if an employee opts to withdraw up to 60% of the individual corpus after retirement, the guaranteed pension will be proportionally reduced. This contrasts with NPS, where the remaining 40% (after the allowed 60% lump sum withdrawal) could be larger, thanks to a higher total monthly contribution (24% under NPS vs 20% under UPS).

The Trade-Offs Government Employees Are Considering

Employees appear to be in wait-and-watch mode, weighing:

• Longevity of service (as UPS requires a minimum of 25 years for full benefits)

• Capital return flexibility under NPS

• Higher corpus potential under NPS due to greater monthly contribution

• Guaranteed income security under UPS versus market-linked returns of NPS

Conclusion

The UPS may provide more certainty in retirement income, but it comes with trade-offs in flexibility, corpus size, and personalisation of annuity options. The scheme is still in its early days, and uptake may rise as employees conduct more detailed evaluations of the benefits. With the deadline of 30 June approaching, the coming weeks will be crucial in determining the broader acceptance of this hybrid pension model.

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