The Indian government recently announced the introduction of the Unified Pension Scheme (UPS) for central government employees. The UPS will exist alongside the New Pension Scheme (NPS), and state governments can also choose to adopt it.
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Under the UPS, employees who have served for 25 years or more will receive 50 percent of their last drawn salary from the past 12 months as their pension.
They will also be eligible for post-retirement inflation-linked increments in their pension amount.
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Cabinet Secretary-designate TV Somanathan stated that the UPS will come into effect on April 1, 2025, and the benefits will apply to those retiring by March 31, 2025, including the payment of any arrears. Employees will have the choice between the UPS and the NPS starting from the upcoming financial year.
India has had two major pension plans: the Old Pension Scheme (OPS) and the National Pension Scheme (NPS).
The Unified Pension Scheme sidelines NPS for government employees, a lost opportunity. The tragedy? NPS could’ve provided far better pensions if implemented as intended.
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The OPS is a Defined Benefit Scheme (DBS) covering only government employees, while the NPS is a Defined Contribution Scheme (DCS) open to public and private employees, as well as all citizens. The introduction of the UPS comes amidst a backdrop of pension politics in India.
Pension reform for central employees
With the rising political dominance of the Bhartiya Janta Party (BJP), opposition parties began offering voters a switch back to the OPS, which promises benefits without any contributions from pensioners. Several state governments have already reverted to the OPS.
The UPS strikes a middle ground between the NPS and the OPS, as it is neither fully government-funded like the OPS nor fully employee-contributed like the NPS. While the UPS will add to the burden on the governments’ fiscal balances, the Centre has assured that the burden will be capped. The attention now shifts to how state governments will react to the UPS, as some states already have precarious fiscal positions with large pension liabilities.
The Reserve Bank of India (RBI) notes that the debt-GDP ratio of some states remains high, with five states having debt levels crossing 40% of GDP in 2024. The exact burden of the UPS will be known once more details are shared by the state governments. As politics in India’s pension economy heats up, the coming times will be chaotic for both governments and citizens.
The UPS marks a significant shift from the Modi government’s usual policy stance of fiscal rectitude and reflects fiscal adventure on the government’s side, which could pose risks for state finances.
