August 29, 2024
📰 FEATURE STORY
Is the Unified Pension Scheme (UPS) a good policy?
Developing a robust pension scheme for government employees in India has been complex. Successive governments have tried in one way or another to satisfy everyone while trying to remain fiscally prudent. It’s easier said than done.
The latest development is the Unified Pension Scheme (UPS) approved by the Union government. It’s the government’s way of reconciling the best aspects of the National Pension System (NPS) and the Old Pension Scheme (OPS). Given the BJP is now in a coalition government, is this a watered-down policy or the best it could be?
Context
Pensions in India can be traced back to British rule, with the Royal Commission of Civil Establishments set up in 1881, giving government workers their first pensions. Back then, the purpose of pensions was to ensure local rulers continued to collect their British pensions and wouldn’t think about a rebellion. The goal was to encourage employees to prepare financially for their lives post-retirement.
Provident funds, pension programs, and gratuity plans are popular retirement options. The problem is that India doesn’t have a robust universal social security system. Due to high poverty and unemployment rates, a payroll tax-financed state pension arrangement would be a bad idea.
Instead, India has opted for pension schemes where the employer and employee contribute. One problem is that coverage is restricted to organised workers. However, the majority are in the unorganised sector.
The government announced the National Pensions Scheme (NPS) in 2004, which rolled out in 2009. It was a pension cum investment scheme through a safe and regulated market-based return.
Then there’s the Old Pension Scheme (OPS). It provided government employees with a guaranteed pension equivalent to 50% of their salaries, which increased with periodic hikes in Dearness Allowance to account for inflation. Government employees were relieved when the OPS returned since they didn’t have to make contributions towards their pension.
When a few states reintroduced this in 2022, it caused a stir. The states wanted a refund of their contributions toward the NPS after 2004. The Centre refused their contribution withdrawal requests. There was also confusion among those who subscribed to the NPS who made regular contributions. They were worried about their deposits.
We now have the Unified Pension Scheme (UPS) applicable from next April onwards. Employees opting for this are guaranteed a pension of 50% of their average basic pay. Employee contribution remains at 10%, while the government’s increased from 14% to 18.5%.
The government has tried to balance the demands of employees while keeping an eye on its finances. Has it succeeded with the UPS?
VIEW: Best possible policy
In some ways, the UPS is the best middle ground everyone could’ve hoped for. Under pressure from the Opposition, the government had to thread the needle. The result was employee contributions with an enhanced share from the Centre. It’s good news for government employees since guaranteed pensions are back. Employees who have joined the service since 2004, including those who have since retired, can switch to the UPS. However, the NPS also continues to remain an option.
The Centre is marketing the UPS as a better option than the NPS. The latter was market-linked and introduced during the stock market boom. However, two decades later, when people began retiring under the NPS, they received much less than they would’ve got under the old scheme. With the UPS, employees are also promised a lump sum payment equivalent to 1/10th of monthly emoluments and gratuity benefits when they retire.
The UPS is also a win for cooperative federalism. The Ministry of Finance has increased the special assistance for capital investment eightfold. In this year’s Budget, it’s ₹1.3 lakh crore. The OPS was non-contributory and unfunded. The state government didn’t have to contribute its share to the pension fund, and payments would kicked down the road to a future government. The RBI became so worried about states reverting to the OPS that it released a paper in 2023 stating the cost of OPS will increase the pension burden by 4.5 times of the NPS.
COUNTERVIEW: Not financially prudent
While over 20 lakh employees will benefit from the UPS, it puts an additional financial burden on the government to the tune of over ₹6,200 crore per year. Putting this aside, the UPS is risky in the long term. If a government is to guarantee defined benefits irrespective of returns on pension funds, future governments must be fiscally healthy. The reality is that many states aren’t since they promise and implement welfare programmes with borrowed money. They also already borrow heavily for salaries, pensions, and interest payments.
The guaranteed payout under the UPS isn’t fully funded. Let’s assume the market performance falls short of the government’s expectations. The Budget will have to cover the shortfall. This wasn’t there with the NPS. The Indian Railways is a good example. Its pension fund was created to cover current pension payments, but the inflows into the fund weren’t always adequate. In 2020-21, the government had to provide ₹79,938 crore worth of support to the railways for Covid losses and compensate for an adverse balance in the pension fund, which reached over ₹28,000 crore.
The UPS might shield the government from accusations of being stingy. However, any shortfall would need to be filled with adequate budget allocations. That’s going to cost the government money. Perhaps the UPS could’ve been made non-contributory, as some have stated once the announcement was made. Although contributions will be made and funds will be allocated, this doesn’t mean the current contributions will fully cover the promised benefits in the long run. Overall, the UPS is essentially a bad hybrid.
Reference Links:
- Old Pension Scheme kicks off controversy as states, employees, govt lock horns – India Today
- 10 things about unified pension scheme – Firstpost
- Centre’s balancing act: comparing Unified Pension Scheme with NPS & OPS – Fortune India
- Centre’s Unified Pension Scheme to give higher pensions: Report – Hindustan Times
- Unified Pension Scheme Must Pave the Way to Fiscal Prudence If It is to Work – The Wire
- Centre’s new Unified Pension Scheme walks back on important reforms. It’s disappointing – The Print
- Unified Pension Scheme: Old, bad ideas in a new package – Moneycontrol
- Unified Pension Scheme to put a Rs 6,250-cr pressure on govt – The Economic Times
What is your opinion on this?
(Only subscribers can participate in polls)
a) The Unified Pension Scheme (UPS) is a good policy.
b) The Unified Pension Scheme (UPS) is a bad policy.
Previous poll’s results:
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- Karnataka’s decision to impose an entertainment cess is wrong: 53.5% 🏆
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