On January 24, 2024, the finance ministry issued a modified gazette notification on the unified pension scheme (UPS) for government employees – but not for teachers. As per the notification, government employees who are under the national pension system (NPS) will be given the choice for UPS.
However, employees and teachers are unimpressed and continue to insist on the restoration of the old pension scheme (OPS). While, on the surface, UPS appears to offer a monthly pension payout similar to the OPS, the details suggest otherwise.
How OPS differs from UPS
To begin with, under the OPS, only the employee made monthly contributions. The resulting corpus was invested in government-guaranteed instruments like fixed deposits of public sector banks and remained tax-exempt throughout.
Premature withdrawals from the corpus did not impact the pension payout but only reduced the corpus size. At the time of retirement, the employee received this corpus along with a monthly pension equal to half of the last drawn basic pay plus dearness allowance, provided their total service was twenty years or more. This monthly pension payout was revised upwards after every pay commission for retired employees.
Also read: Why Government Teachers and Employees Are Demanding the Restoration of the Old Pension Scheme
Additionally, at the time of retirement, the employee could opt to commute their pension, whereby a certain fraction of the cumulative future pension payout could be received in advance and then repaid over a period of up to 15 years, after which the full pension would be restored.
Under the UPS, the employee contributes 10% of their monthly basic pay and dearness allowance, and the government makes a matching contribution. This total amount is credited to the individual corpus. Employees have various options to invest this corpus, with a certain default pattern.
The accumulated amount is credited to the individual corpus. Additionally, the government allocates and manages an amount equal to 8.5% of the basic pay and dearness allowance. The accumulated amount in this second segment is known as the pool corpus.
Throughout the employee’s service, the government estimates what is known as the benchmark corpus based on the following assumptions:
- Regular monthly contributions from both the employee and the government.
- If some contributions are missed, the individual corpus will be less than the benchmark corpus.
- The value of the benchmark corpus is estimated assuming the default pattern of investment has been followed throughout.
At the time of retirement, the employee is informed about the gap between the benchmark corpus and the individual corpus. If the employee remits this difference to the pool corpus, the monthly pension payout equals half of the monthly average of the last 12 months’ basic pay plus dearness relief.
If the employee does not remit this difference, the monthly pension payout is reduced to half of the monthly average of the last 12 months’ basic pay multiplied by the ratio of the individual corpus to the benchmark corpus, plus dearness relief.
Let’s use a simple numerical illustration to understand how this works. Assume that the average monthly basic pay for the last 12 months before retirement is Rs 1,50,000. Let the benchmark corpus of an employee be Rs 1 crore. If the individual corpus is also Rs 1 crore, the monthly pension payout is Rs 75,000 plus dearness relief.
However, if the individual corpus is 80% of the benchmark corpus (i.e. Rs 80 lakh), and the employee does not transfer Rs 20 lakh from their own funds to the pool corpus, the monthly pension payout will be reduced to Rs 60,000 plus dearness relief.
How likely is it that the individual corpus will fall short of the benchmark corpus and therefore have an adverse impact on their post-retirement pension?
- The employee may face unforeseen family contingencies during their service. If they withdraw some amount from their individual corpus, this will adversely affect their post-retirement pension.
- Any missing or delayed contributions by the employee or the government will result in the individual corpus falling short of the benchmark corpus thereby reducing their post-retirement pension.
- If the employee attempts to recoup the adverse impact of the above circumstances by shifting to a non-benchmark pattern of investment for their individual corpus and this does not yield higher returns, the gap between the benchmark corpus and the individual corpus will widen further.
In other words, the employee is damned if they do and damned if they don’t – but it doesn’t end there.
Compared to the OPS, the minimum years of service required to obtain a full pension has been increased from 20 to 25 years. Thus, an employee with only 20 years of service at retirement will receive only 80% of the pension payout under UPS.
Moreover, unlike the OPS, there is no provision for upward revision of pension under UPS after the implementation of subsequent pay commission reports.
Employees who retired under the NPS may also be expected to pay the difference between the benchmark corpus and the individual corpus to obtain the UPS-based pension. If, as is likely, they have been compelled by unavoidable circumstances to spend part or all of their non-pension payout after retirement, their ability to pay this difference will be severely limited.
In other words, the de jure retrospective application of UPS to NPS retirees has been implemented in such a way that it is de facto not applicable to most such retirees.
Furthermore, there is no provision for commutation of pension under UPS, unlike in the OPS.
Family pension
Family pension under UPS is only admissible to the spouse and not to other relevant categories covered under OPS, such as parents (in the case of unmarried employees), sons under the age of 25, unmarried daughters without employment, widowed daughters without employment, and disabled sons and daughters.
Additionally, under the OPS, the family of a deceased employee with a certain minimum length of service received a family pension of 50% of the last drawn basic pay plus dearness allowance for 10 years, reverting to 30% of the last drawn basic pay plus dearness allowance thereafter. The shift to UPS is, therefore, an adverse blow to the most vulnerable.
The lump-sum payment to a retired employee under UPS will be the sum of the monthly basic pay and allowances multiplied by a certain number of months. The number of such months is one-fifth of the completed years of service. For example, an employee who retires after 25 years of service will be entitled to 5 months of basic pay and dearness allowance as a lump-sum payment. This is well below the return of the entire corpus with interest under OPS.
Also read: Unified Pension Scheme Must Pave the Way to Fiscal Prudence If It is to Work
In other words, the introduction of UPS seems to be a means to deflect the legitimate concerns of employees and teachers regarding the NPS without actually delivering a pension scheme that matches the OPS. The actual pension payout for most retired employees under UPS will fall well short of what is provided under OPS. Moreover, the UPS falls short of the OPS in various other ways, as we have pointed out.
However, these facts have been obscured by the introduction of complexities, such as unpredictable factors like the temporal ratio of the individual corpus to the benchmark corpus, intricacies and the silences we have highlighted. Therefore, it is no surprise that employees and teachers reject the UPS and reiterate their demand for the OPS.
Lastly, the demand for OPS is not a drag on government revenue. Pension payouts are likely to be mostly spent, which will increase output, employment, and tax revenue. This tax revenue (in the form of direct and indirect taxes) will partly recoup the expenditure on pensions. Moreover, the very stability of macroeconomic demand due to pensions will result in greater investment, including innovation-promoting investment, further increasing tax revenue. In other words, the demand of employees and teachers for OPS is not only fair and just but also socially rational.
Mithuraaj Dhusiya is Associate Professor, Department of English, Hansraj College, University of Delhi and C. Saratchand is Professor, Department of Economics, Satyawati College, University of Delhi.
