| GS Paper 2: Government Policies, Schemes, Governance. |
Why in the news?
The Unified Pension Scheme (UPS), which would guarantee government employees’ pensions upon retirement, was approved by the Union Cabinet on Saturday, August 24. As per the government’s declaration, the policy would come into force on April 1, 2025.
The Unified Pension Scheme of India is a framework designed to streamline and integrate the several pension plans that are presently offered in the nation.
By combining several current pension plans under one roof, the program seeks to streamline the pension system and guarantee that all employees, whether in the official or informal economy, have access to a stable retirement income.
KEY FEATURES OF THE UNIFIED PENSION SCHEME :
- Ensured Pension: In accordance with UPS, workers will be entitled to a pension equal to half of their mean base pay for the final 12 months prior to retirement. With a proportionate reduction for those with 10 to 25 years of service, this is applied to individuals who have served for a minimum of 25 years. (or)
For a minimum of 25 years of eligible service, 50% of the average basic salary is drawn during the final 12 months before superannuation. This compensation must be proportionate with shorter service durations up to a minimum of ten years of service.
- Family Pension: 60% of the employee’s pension will be paid to the employee’s family in the case of their death, providing them with ongoing financial support.
- Minimum Pension Guarantee: For participants who have served for at least ten years, the program ensures a minimum pension of ₹10,000 per month.
- Dearness Allowance: Under inflation trends, there will be periodic increases to the pension’s dearness relief.
- Lump-Sum Payment: Employees will receive a lump sum payment in addition to their gratuity at the time of superannuation. For every six months of completed service, this payment will be made at the rate of one-tenth of the monthly emoluments (pay + DA) without lowering the guaranteed pension.
Contributions under the UPS:
- 10% of an employee’s salary must be contributed as part of the contributing plan.
- 5% of the pay is to be contributed by the government.
- To maintain the sustainability of the program, the government’s contribution may be modified in response to recurring actuarial evaluations.
Difference between OPS, UPS, and NPS:
|
OPS |
NPS |
UPS |
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Defined Benefit Plan: OPS was a defined benefit plan in which the pension was pre-calculated and modified for inflation. Typically, the pension was equal to 50% of the last wage drawn. |
Defined Contribution Plan: NPS is a defined contribution plan in which government and employee contributions are made to a pension fund. The amount of the pension is determined by the annuity acquired at retirement and the corpus that has been gained. It is not fixed. |
Combined Features: UPS offers a mix of guaranteed benefits and market-linked returns by combining the advantages of both OPS and NPS. |
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Government-funded: There was no direct employee contribution to the program; all funding came from the government. |
Market-related Returns: Because NPS returns are related to the performance of the selected investment options, the eventual pension corpus may differ. |
Guaranteed Minimum Pension: One of the main issues with NPS is that, in contrast to NPS, UPS might provide a guaranteed minimum pension to assure retirement security. |
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The impact on the Exchequer: Because OPS was unfunded, it placed a heavy financial strain on the government and raised questions about its long-term financial stability. |
NPS is both flexible and portable, allowing for a wide range of investing options. It has been criticized, meanwhile, for not providing pension benefits that are assured. |
Sustainability: The program would probably involve government and employee donations, but unlike OPS, it would be financially self-sustaining. |
SIGNIFICANCE OF UPS :
- Streamlined and Integrated: UPS is anticipated to be more streamlined and integrated, providing a uniform pension framework that may take the place of the several systems already in use, making it simpler for staff members to administer and comprehend.
- Inclusivity: All sectors of the workforce are intended to be covered by the program, including those in the unorganized sector, who frequently do not have access to official pension plans. This is especially important in India, where the informal sector employs a large share of the labour force.
- Centralized Administration: A centralized authority would oversee the program, guaranteeing consistency in the administration and execution of pension benefits throughout the nation.
- Enhanced Benefits: The system intends to give retirees enhanced pension benefits, guaranteeing a more secure and stable retirement by combining resources and managing money more effectively.
- Financial Literacy: To help workers, especially those in the informal sector, make educated decisions regarding their retirement planning, efforts will be made to increase financial literacy as part of the strategy.
Challenges :
1. Transition Process: Combining several programs with dissimilar guidelines and advantages into one cohesive system may be difficult and necessitate thorough planning to prevent disadvantages for current participants.
2. Funding and Sustainability: It’s imperative to guarantee the Unified Pension Scheme’s financial stability. To ensure long-term viability, this entails figuring out contribution rates, government assistance, and investment strategies.
3. Legal and Regulatory Framework: The current legal and regulatory framework regulating pension systems in India would need to be significantly modified to adopt a single program.
In summary
Retirees are going to feel a great sense of relief and security from the Unified Pension Scheme, which will guarantee them a consistent income and shield them from the impacts of inflation.
To put it simply, the UPS may offer a compromise between the flexibility and market-linked returns of NPS and the predictability and security of OPS, with the goal of developing a more balanced and long-lasting pension scheme for public servants.
The Indian government is working to improve and streamline the social security system for its workers, and the UPS is a part of that endeavor.
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