Union Cabinet Greenlights Unified Pension Scheme for Government Employees

27 Aug Union Cabinet Greenlights Unified Pension Scheme for Government Employees

This article covers “Daily Current Affairs” and topic details of the Unified Pension Scheme

Syllabus mapping:

GS-2: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

For Prelims:

What are the UPS, NPS, and OPS and their features?

For Mains:

Social Security and Challenges in India Social security and ways to make social safety net more strong.

Why in the News?

Government employees have welcomed the Union Cabinet’s decision to approve the Unified Pension Scheme (UPS), providing assured pensions to them. They also thanked Prime Minister Narendra Modi for meeting with them on the issue. Shiv Gopal Mishra, Secretary of the Joint Consultative Machinery (JCM), a joint forum of government employees’ organizations, said they were invited by the Prime Minister for the meeting. He said this was the first time that JCM was invited by the Prime Minister.

Evolution of pension scheme in India:

The Old Pension Scheme (OPS) 1972:

The Old Pension Scheme (OPS) in India was launched with the establishment of the Central Civil Services (Pension) Rules, in 1972. The Old Pension Scheme (OPS) in India, which was in place prior to the introduction of the New Pension Scheme (NPS) in January 2004, had several distinctive features that defined its operation and benefits.

FEATURES OF OPS:

1. Defined Benefit System
Fixed Pension: Under OPS, retirees were entitled to a fixed monthly pension based on their last drawn salary. This pension was calculated as a percentage of the average of the highest pay drawn during the last years of service.

2. Pension Calculation
Percentage of Last Pay: The pension was generally computed as a percentage of the last drawn salary, typically around 50% of the average of the last 10 months’ pay.
Dearness Allowance (DA): Pensioners were also eligible for Dearness Allowance, which is adjusted to offset the impact of inflation on their pension.

3. Generous Benefits
Lifelong Pension: Pension was provided for life, ensuring financial stability for retirees.
Family Pensions: In case of the death of the pensioner, a family pension was granted to the spouse and dependent family members, typically at a reduced rate (often around 30-50% of the pension).

4. Pre-Retirement Service
Service Continuity: The pension was based on the entire length of service, with the final pension being determined by the number of years served and the highest salary drawn.
No Impact of Market Fluctuations: The pension amount was not subject to market fluctuations or investment risks.

5. Government Obligation
Government Liability: The government bore the entire financial responsibility for the pension payouts, with no direct investment from the employees.

6. No Provident Fund
No GPF Contributions: The OPS did not include contributions to a General Provident Fund (GPF) or similar savings schemes. Employees did not accumulate a corpus of funds for retirement.

7. Pension Revision
Periodical Revision: Pension amounts were periodically revised by the government to keep up with inflation and changes in the cost of living. This was generally done through periodic pay commissions.

8. Limited Flexibility
No Lump Sum Withdrawals: OPS did not allow for lump sum withdrawals or partial withdrawals of the pension corpus during the employee’s service or upon retirement.

9. Non-Contributory
Absence of Employee Contributions: Employees under OPS did not contribute any portion of their salary towards their pension benefits; the pension was fully funded by the government.

Issues with ops:

1. Financial Burden on the Government
Fiscal Strain: OPS placed a considerable financial burden on the government as it was responsible for paying pensions to retirees from the general budget. This burden grew over time with increasing numbers of retirees.
Unpredictable Liability: The financial liability for pensions was unpredictable and could fluctuate with changes in the number of retirees and inflation, leading to budgetary strain.

2. Lack of Sustainability
Increasing Costs: As the number of retirees increased and life expectancy rose, the costs of maintaining the OPS became unsustainable for the government.
No Investment Component: OPS did not include an investment component where contributions could be accumulated and invested to generate returns. This limited the growth of pension funds and increased financial pressure on the government.

3. No Employee Contribution
Absence of Personal Savings: Employees did not contribute towards their pension during their working years, resulting in a lack of personal savings and a significant fiscal responsibility for the government.
Lack of Personal Stake: Since employees did not make contributions, they had no personal stake in the growth or management of their pension funds.

4. Inflexibility
Fixed Benefits: The OPS provided fixed benefits based on the last drawn salary and service length, which were not adjustable based on individual financial needs or market conditions.
No Lump Sum Withdrawals: The scheme did not allow for lump sum withdrawals or partial withdrawals, which could be beneficial in certain situations.

5. Limited Adaptability
No Market Linkage: OPS was not linked to market performance or economic conditions, which meant that pensions were not adjusted based on investment returns or economic changes.
Delayed Revisions: While pensions were revised periodically, these revisions were not always timely or reflective of current economic conditions, leading to potential inadequacies in pension amounts.

6. Encouragement of Early Retirement
Early Retirement Incentives: The guarantee of a pension based on the last drawn salary might encourage some employees to retire early to maximize their pension benefits, potentially leading to a loss of experienced personnel.

7. Potential for Inequity
Generational Disparities: OPS could create inequities between generations of government employees, especially as newer employees under the NPS had to contribute to their pensions, while older employees enjoyed guaranteed benefits.

8. Lack of Personal Control
No Choice in Investment: Employees had no control over how their pension funds were managed or invested, as there were no personal accounts or investment options under OPS.

New Pension Scheme (NPS) 2004:

The New Pension Scheme, introduced by the Government of India, represents a significant shift from the previous Defined Benefit Pension System to a Defined Contribution Pension System.

Features of the New Pension Scheme

Tier-I and Tier-II Accounts: The New Pension Scheme is structured into two tiers. Tier-I is mandatory for new government servants joining on or after January 1, 2004, involving a monthly contribution of 10% of Basic Pay, Dearness Pay (DP), and Dearness Allowance (DA). The government matches this contribution, and the funds are kept in a non-withdrawable Tier-I account. Tier II is optional, allowing for additional voluntary contributions that can be withdrawn at the individual’s discretion, though it remains non-operational during the interim period.
No GPF or Defined Benefit Pension: New entrants are not covered under the General Provident Fund (GPF) or the old Defined Benefit Pension System.
Regulatory Framework: The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), with the Central Pension Accounting Office (CPAO) functioning as the interim central record-keeping agency until a regular setup is established.
Annuity Requirement: Upon retirement or exit at age 60, 40% of the accumulated pension wealth must be used to purchase an annuity for life, with an increased mandatory annuitisation of 80% for those exiting before age 60.
PPAN Allocation: The PAO assigns a unique 16-digit PPAN, with the structure indicating the year of joining, ministry type, PAO code, and serial number. This number helps in tracking and managing pension contributions.
Monthly Contributions: Contributions are to be deducted starting from the salary of the month following the joining date, with no recovery for the month of joining. The government matches this contribution.
Contribution Details: Contributions should be 10% of the Basic Pay, DP, DA, and NPA. Adjustments are made for any pay revisions or arrears.
No GPF Deductions: There will be no GPF contributions for new entrants as it is not applicable.

ISSUES EMERGED WITH NPS:

Lack of Assured Returns: Unlike the OPS, which provided defined benefits based on final salary, the NPS operates on a defined contribution basis. This means that the pension amount depends on the contributions made and the performance of the invested funds, leading to uncertainty in returns.
Market Risks: The NPS investments are subject to market risks as they are invested in a mix of equities, government securities, and corporate bonds. This exposure to market fluctuations can impact the eventual pension amount, especially in periods of economic downturns.
Annuity Requirement: Upon retirement, a minimum of 40% of the accumulated corpus must be used to purchase an annuity, which provides a pension for life. This requirement has been criticized because annuities can offer lower returns compared to other investment options and are subject to varying terms and conditions.
Limited Withdrawals: The NPS has stringent rules regarding withdrawals. For example, partial withdrawals are allowed only for specific purposes like higher education, medical emergencies, or buying a house. This limited liquidity can be a drawback for contributors needing access to their funds.
Administrative Challenges: The implementation of the NPS faced challenges such as setting up an efficient record-keeping system, handling contributions, and managing multiple Pension Fund Managers. Initially, these administrative issues led to delays and confusion among contributors.
Complexity and Lack of Awareness: The NPS is perceived as complex compared to the OPS. The various tiers, investment choices, and rules around withdrawals have made it difficult for many employees to fully understand and engage with the scheme.
Impact on Lower-Ranked Employees: For lower-ranking employees or those with shorter service periods, the final pension amount under the NPS may be significantly lower compared to what they would have received under the OPS, especially if their salary and contributions are lower.
No Provision for Past Service: The NPS does not cover past service under the OPS. Employees who joined before the NPS was introduced but continued in service under the old scheme do not have their past service counted towards their NPS benefits.

Unified Pension Scheme (UPS)

The Union Cabinet, chaired by Prime Minister Narendra Modi, has recently approved a new Unified Pension Scheme (UPS), which incorporates several key features aimed at enhancing the pension benefits for government employees.

Key Features of the Unified Pension Scheme (UPS):

Assured Pension: Employees are guaranteed a pension amounting to 50% of their average basic pay drawn over the last 12 months before retirement. This benefit is based on a minimum qualifying service of 25 years, with proportional benefits for those with less than 25 years but at least 10 years of service.
Assured Family Pension: In the event of an employee’s demise, the family is entitled to a family pension that is 60% of the pension amount the employee was receiving immediately before their death.
Assured Minimum Pension: Retirees are assured a minimum pension of ₹10,000 per month, provided they have completed at least 10 years of service.
Inflation Indexation: Both the assured pension and family pension, along with the assured minimum pension, will be adjusted for inflation. This adjustment will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to the dearness relief provided to service employees.
Lump Sum Payment at Superannuation: In addition to the pension and gratuity, employees will receive a lump sum payment upon retirement. This amount will be calculated as 1/10th of the monthly emoluments (basic pay + Dearness Allowance) as of the retirement date for every completed six months of service. Importantly, this lump sum payment will not affect the amount of the assured pension.

Conclusion:

The UPS aims to provide comprehensive and inflation-protected pension benefits, ensuring financial stability for retirees and their families while also offering a lump sum payment upon retirement. This new scheme represents a significant shift towards providing more predictable and secure retirement benefits for government employees.

PRELIMS QUESTION:

Q. Consider the following Information:

In how many of the above rows is the given information correctly matched?
(a) Only one
(b) Only two
(c) Only three
(d) None

ANSWER: A

MAINS QUESTION:

In light of the recent approval of the Unified Pension Scheme (UPS) by the Union Cabinet, how does the new scheme address the shortcomings of the Old Pension Scheme (OPS) and the New Pension Scheme (NPS) in terms of financial security, equity, and sustainability? Evaluate.

(250 words 15 marks)

Munde Dhananjay Navnath