Indian Government Launches Unified Pension Scheme for Central Employees: Key Features and Benefits Explained

The Indian government has introduced a significant change to its pension system. This reform establishes the Unified Pension Scheme (UPS) for central government employees who were appointed on or after January 1, 2004. The UPS combines the market-linked National Pension System (NPS) with guaranteed pension benefits.

According to a notification from the Ministry of Finance, the new scheme is officially named the Central Government Unified Pension System Rules, 2023. The aim is to enhance retirement security while also ensuring responsible fiscal management.

The UPS applies to specific groups of employees.

· All central government employees (excluding those in the armed forces) who began their service on or after January 1, 2004, are included.

· Employees who are already participating in the NPS will be automatically transitioned to the UPS.

· The old pension scheme will continue for those who were appointed before January 1, 2004.

The Unified Pension Scheme has several key features.

Retiring employees will receive a guaranteed minimum pension. This pension will be equivalent to 40% of their last basic salary.

The government, as the employer, will contribute 14% of the employee's basic pay plus dearness allowance to the pension fund.

Employees will continue to contribute 10% of their basic salary and dearness allowance.

In the event of a subscriber's death, a family pension equivalent to the old pension scheme will be provided.

The scheme will continue to be managed through the existing NPS framework. The Pension Fund Regulatory and Development Authority (PFRDA) will oversee its administration.

The UPS introduces some notable changes compared to the NPS.

Unlike the NPS, which is subject to market fluctuations and does not guarantee a minimum pension, the UPS offers a guaranteed minimum benefit while still allowing for flexible NPS investments.

The scheme also automatically includes death-cum-retirement gratuity (DCRG) and leave encashment benefits.

According to the finance ministry, this ensures “a defined level of pension income while preserving long-term fund sustainability.”

The Department of Economic Affairs has also released a detailed Frequently Asked Questions (FAQs) document. This document provides clarifications on various aspects of the UPS.

Some key questions and answers include:

"Q: Is this a return to the Old Pension Scheme (OPS)?

A: No. The UPS retains the structure of the NPS while guaranteeing minimum pension benefits , unlike the fully budget-funded OPS."

"Q: Will pension be market-linked?

A: Yes, contributions will continue to be invested via NPS, but the government ensures at least 40 per cent of last salary as pension upon retirement."

"Q: Can an employee opt out?

A: No. All eligible employees are mandatorily covered under the UPS."

"Q: What happens in case of death during service?

A: Family will receive enhanced family pension at the rate applicable under the old system."

This hybrid model aims to strike a balance between the fiscal sustainability of the NPS and the public's desire for pension security. While the UPS does not revert to the Old Pension Scheme, the guaranteed minimum pension addresses concerns about financial insecurity after retirement. This has been a major criticism of the NPS until now.