Unified Pension Scheme: Features, Eligibility, Benefits & Challenges

Why in the News?

• PFRDA has notified the Operationalization of Unified Pension Scheme under National Pension System Regulations, 2025, marking a major reform for Central Government employees under the National Pension System (NPS).

Background and Context of Unified Pension Scheme

• The Unified Pension Scheme (UPS) was introduced as a middle path between the New Pension System (NPS) and the Old Pension Scheme (OPS) for Central Government employees. 
• While the NPS is a market-linked pension system, offering returns based on market performance and contributing towards fiscal sustainability, it has been critiqued for lacking guaranteed benefits. 
• On the other hand, the OPS, which provides defined benefits (a fixed pension), has a high fiscal burden on the government. 
• The Somanathan Committee formed in 2023 recommended a restructuring of the NPS, paving the way for the introduction of the UPS. 
• The government implemented these recommendations by notifying the PFRDA Regulations for 2025, introducing the UPS as a hybrid model that ensures some degree of assurance while being financially viable for the government.

What is the Unified Pension Scheme (UPS)?

• The Unified Pension Scheme (UPS) is designed as an optional pension plan available to Central Government employees who are currently covered under the National Pension System (NPS).
• It is a hybrid pension model that combines the assured pension benefits characteristic of the OPS with the contribution-based model of the NPS. 
• This new system aims to provide retirement security with guaranteed benefits while maintaining fiscal sustainability. 
• The main objective of the UPS is to offer post-retirement income security, by assuring a minimum guaranteed pay-out to the employee while also being based on market-linked investments that accumulate over time. 
• By doing so, it attempts to address the insecurity created by the NPS and the fiscal burden imposed by the OPS.

Implementing Agency: PFRDA

• The Pension Fund Regulatory and Development Authority (PFRDA) is the statutory body responsible for the implementation and oversight of the UPS. 
• Established in 2003, the PFRDA was formally constituted under the PFRDA Act, 2013. 
• It functions under the Ministry of Finance and plays a crucial role in promoting old-age income security by regulating pension funds and protecting the interests of pension fund subscribers. 
• PFRDA regulates entities such as the NPS Trust, Pension Funds, Central Recordkeeping Agencies (CRA), and other financial intermediaries involved in pension management. 
• In the case of UPS, PFRDA has adapted the existing NPS infrastructure to ensure smooth implementation and management of this new scheme.

Who Can Opt for UPS?

• The Unified Pension Scheme (UPS) is available to a broad category of Central Government employees. 
• It applies to existing employees covered under NPS as of April 1, 2025, as well as to new recruits who join government services from April 1, 2025, onwards. 
• Additionally, employees who have superannuated, voluntarily retired, or retired under FR 56(j) before March 31, 2025, can also opt for the UPS. 
• In cases where the employee has passed away before exercising the option, their legally wedded spouse can choose the UPS on their behalf. 
• This ensures that the benefits of the UPS extend beyond current employees to those who may have already retired or passed away, ensuring continuity of benefits for their families.

Eligibility Criteria for Pension (Assured Payout)

• For employees to qualify for an assured pension payout under the UPS, certain service requirements must be met. 
• An employee must complete at least 10 years of qualifying service to receive the assured pension pay-out upon superannuation. 
• If the employee retires under FR 56(j), which involves premature retirement due to inefficiency or public interest, they must also have completed 10 years of service to be eligible for the pay-out. 
• For those opting for voluntary retirement after completing a minimum of 25 years of service, the pension pay-out will begin from the employee’s original superannuation age—the age at which they would have retired had they continued working. 
• These conditions ensure that employees who have served for a significant period are eligible for post-retirement benefits under the UPS.

Contribution Structure of Unified Pension Scheme

• Under the Unified Pension Scheme, both employees and the Central Government contribute towards the employee's pension fund. 
• The employee’s contribution is 10% of their Basic Pay, which includes the non-practicing allowance (NPA) and Dearness Allowance (DA). 
• On the other hand, the government's contribution is 8.5% of the employee’s Basic Pay, also including NPA and DA. 
• This contribution structure is higher than what was previously offered under the NPS, where the government's contribution was 14% of the employee's pay. 
• The total contribution from both parties will accumulate in the individual corpus, which will be invested and used to provide an assured pay-out upon retirement or superannuation. 
• The government’s higher contribution helps ensure that the scheme remains financially viable while offering employees a degree of pension security.

PRAN and NPS Architecture

• The Permanent Retirement Account Number (PRAN) plays a crucial role in managing the accounts of individuals who opt for the UPS. 
• Just like under the NPS, when an individual joins the UPS, they are assigned a PRAN. 
• This number is unique to each employee and helps track their contributions, accumulated funds, and transactions within the system. 
• The UPS is implemented using the existing NPS architecture, which includes intermediaries such as NPS Trust, Pension Funds, Central Recordkeeping Agencies (CRA), and Trustee Banks. 
• These intermediaries manage the contributions, ensure the safe investment of funds, and maintain the transparency and efficiency of the system. 
• By using the existing infrastructure, the government aims to reduce the administrative burden and cost of setting up a new pension system.

Pay-out Structure under UPS

• The pension pay-out under the Unified Pension Scheme is structured to ensure employees receive a guaranteed income post-retirement, based on their final salary and the length of service. 
• The assured pension pay-out is 50% of the average of the last 12 months’ Basic Pay of the employee, provided they have completed at least 25 years of qualifying service.
• If an employee has completed between 10 to 25 years of service, they will receive a proportionate pension based on the number of years worked. 
• Moreover, if the individual corpus falls below the benchmark corpus, the pay-out can be reduced proportionally. 
• A minimum guaranteed pension of ₹10,000 per month will be paid to those with at least 10 years of service, ensuring a base level of support for retirees.

Family Pension Provisions

• In the unfortunate event of the death of a UPS subscriber, the legally wedded spouse is entitled to receive 60% of the monthly pension for life. 
• However, it is important to note that the family pension under the UPS is limited to the spouse alone. 
• Other family members, such as children or dependent parents, are not entitled to a family pension. 
• This limitation makes the UPS less comprehensive compared to the OPS, which often includes benefits for other dependents as well. 
• The family pension is adjusted periodically to account for inflation through Dearness Relief (DR).

Dearness Relief (DR)

• A key feature of the UPS is the provision for Dearness Relief (DR). 
• The government will periodically declare DR to account for inflation and preserve the real value of pensions. 
• This relief will be added to both the admissible pay-outs for retirees and the family pensions for surviving spouses. 
• By introducing DR, the UPS ensures that pensioners are shielded from inflationary pressures, which is crucial for maintaining the purchasing power of their pension income.

Comparison: UPS vs. NPS vs. OPS

• The Unified Pension Scheme is designed to combine the best aspects of the New Pension System (NPS) and the Old Pension Scheme (OPS). 
• While the NPS operates as a defined contribution system, where the pension depends on market-linked returns, and the OPS is a defined benefit system offering guaranteed payouts regardless of market performance, the UPS offers a hybrid solution. 
• The UPS provides guaranteed pension benefits to employees while also relying on contribution-based funding, akin to NPS. 
• In contrast to the OPS, which is fully government-funded, the UPS requires both employee and government contributions. 
• This makes the UPS more fiscally sustainable than the OPS while also offering greater pension security than the NPS.

Challenges of UPS

• Despite its many advantages, the Unified Pension Scheme (UPS) faces several challenges. 
• The most significant challenge is the increased fiscal burden on the government, as the contribution requirement from the government rises to 18.5%, up from 14% under the NPS. 
• This will likely increase government expenditure by an estimated ₹6,250 crore annually. 
• Another challenge is the delayed pension for voluntary retirees, as they will only begin receiving pay-outs from their original superannuation age, not immediately after retirement. 
• The limited scope of family pensions is also a concern, as only the spouse benefits, leaving other dependents unprotected. 
• Lastly, there may be political opposition, especially from OPS supporters, who prefer the traditional defined benefit system over the new hybrid model.

Key Takeaways

• The Unified Pension Scheme (UPS) provides a balanced solution for Central Government employees by offering a guaranteed pension while maintaining fiscal responsibility. 
• It addresses key concerns associated with the NPS and OPS by ensuring retirement security and inflation protection, but challenges remain in terms of cost, administration, and the scope of benefits. 
• As UPS is implemented, clear communication, stakeholder engagement, and ongoing evaluation will be crucial to ensure its success.