Vishleshan for Regulatory Exams, 26th August 2025: Unified Pension Scheme vs NPS and OPS

Want to get ready for the UPSC, RBI, SEBI, or NABARD exam? If yes, you have to stay updated about important economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss Unified Pension Scheme Benefits and Issues. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.

Unified Pension Scheme: Unifying Absolutely No One

Context: PFRDA chairman S. Ramann has underscored the need for new measures to increase enrolments under the Unified Pension Scheme, as current figures remain low. The Atal Pension Yojana, however, has seen significant success with over 8.1 crore subscribers and strong youth participation.

Link to the Article: Mint

The Unified Pension Scheme (UPS), a new hybrid model for government employees, is facing challenges in its early stages, with a “modest” uptake of just 31,555 central government employees switching from the National Pension System (NPS). This slow adoption, despite the government extending the deadline, has prompted the Pension Fund Regulatory and Development Authority (PFRDA) to consider fresh measures to raise enrolments. The UPS’s introduction marks the latest step in India’s pension reform journey, which has seen a shift from the guaranteed benefits of the Old Pension Scheme (OPS) to the market-linked returns of the NPS, and now, to a hybrid model that seeks to balance social security with fiscal prudence.

Background of Pension Schemes in India:

India’s pension policy has evolved significantly since independence, moving through distinct phases in its approach to providing retirement security.

• Old Pension Scheme (OPS):
  • History and Flaws: The OPS was a defined benefit pension system, where the government guaranteed a fixed monthly pension, typically equivalent to 50% of the last-drawn salary, to retired employees. The scheme’s benefits were fully funded by the government’s budget, with no employee contribution. Over time, this became fiscally unsustainable, as increasing longevity and a growing number of retirees placed an enormous burden on government finances.
  • The Politics of OPS: The demand to bring back the OPS in some states has become a political issue, driven by employees’ desire for a guaranteed, non-contributory pension, which is seen as more secure than the market-linked returns of the NPS.
• National Pension System (NPS):
  • Introduction: The NPS was introduced for new central government staff in 2004, replacing the OPS. It is a contributory, market-linked pension system, where both the employee and the government contribute to a pension fund. The final pension amount depends on the returns generated by the market over the employee’s service period.
  • Advantages of NPS over OPS: The NPS is a more fiscally sustainable model as it reduces the long-term pension liability on the government. It also provides a transparent and portable pension account for employees.
• T. V. Somanathan Committee: This committee was formed in 2023 to “evaluate and reform the existing pension systems”. The Unified Pension Scheme (UPS) was conceptualized on the basis of its recommendations.

Unified Pension Scheme (UPS):

The UPS, approved by the Union Cabinet in 2024 and effective from 1st April 2025, represents a significant shift in India’s pension landscape, combining features of both the OPS and NPS.

• Eligible Beneficiaries:
  • Existing Employees (under NPS as of 1st April 2025): Current government employees already in the NPS have the option to switch to the UPS.
  • New Recruits (joining on or after 1st April 2025): Fresh entrants to central government services will be automatically covered under the UPS, but they can opt for NPS.
  • Past NPS Employees (superannuated/retired before 31st March 2025): Retired NPS subscribers are also eligible to benefit from the UPS retrospectively.
• Key Features:
  • Assured Pension: The scheme provides an assured pension of 50% of the average basic pay (last 12 months) upon retirement, for a minimum qualifying service of 25 years. For service between 10 and 25 years, the pension is proportionately reduced.
  • Assured Minimum Pension: It guarantees a minimum pension of ₹10,000 per month for those with at least 10 years of service.
  • Assured Family Pension: In case of the subscriber’s death, the family receives 60% of the assured pension.
  • Inflation Indexation: All pension benefits (regular, family, and minimum) will be inflation-indexed, with Dearness Relief (DR) linked to the All India Consumer Price Index for Industrial Workers (AICPI-IW).
  • Lump Sum Benefit: At retirement, a one-time lump sum payment is made in addition to the gratuity, calculated as 1/10th of monthly emoluments for every six months of completed service.
• Contribution and Corpus Management:
  • Employee Contribution: Remains at 10% of basic salary + DA, similar to NPS.
  • Government Contribution: The government’s contribution is higher at 18.5%, split into two components: a matching 10% to the Individual Pension Fund (IPF) and an additional 8.5% to a Guarantee Reserve Fund (GRF). This dual structure ensures sustainability and provides a buffer to honour pension guarantees.
• Choice-Based System: Both existing and new employees have the option to choose between NPS and UPS. However, the choice is final and irrevocable once made.
• Retrospective Benefit: Past NPS retirees can opt for the UPS and will be paid arrears with interest at PPF rates, ensuring fairness and equity.

Analysis of the Article: Decoding the UPS’s Early Challenges

The article highlights the low initial uptake of the UPS among central government employees and connects this to the broader context of pension reform in India.

• Modest Uptake of UPS: As of 20 July, only 31,555 central government employees had switched from NPS to UPS. This is a “modest” figure compared to the Atal Pension Yojana (APY), which has crossed 81 million subscribers.
• PFRDA’s Concern and Call for Action: The PFRDA Chairman, S. Ramann, acknowledged the modest uptake and said that the PFRDA needs to “bring in fresh measures to raise enrolments” under the UPS, especially since the government had extended the deadline to 30 September.
• The Pension Policy Shift: The article contextualizes the UPS as the latest step in India’s evolving pension policy, which has shifted from the guaranteed benefits of OPS to the market-linked NPS and now to a “hybrid model” that restores an assured benefit.
• Lessons from APY: The success of the Atal Pension Yojana is highlighted as a model for pension coverage. APY, now in its 10th year, has crossed 81.1 million subscribers and saw its fastest-ever 5 million subscriber additions in a single fiscal year. The scheme has over ₹48,000 crore of assets under management (AUM) and a 9.12% CAGR since its inception, proving to be a “robust and sustainable pension product”. This success, particularly among the youth (46% enrolments from ages 18–25) and female population (55% women enrolments in FY25), underscores the importance of a well-supported and targeted pension scheme.
• Broader Implications of Pension Reform: The UPS emerges at a “critical juncture when India’s life expectancy has increased substantially”. Life expectancy has risen to 72.24 years in 2024 from 61.4 years in 1998, but the retirement age remains the same, placing a “heavier burden on government finances”. The UPS is designed to balance social security with fiscal prudence, but the slow initial uptake suggests that the government and PFRDA need to work harder to communicate the scheme’s benefits and ensure its successful implementation.

In conclusion, while the Unified Pension Scheme is a significant and positive step in India’s pension reform journey, its modest initial uptake indicates that more needs to be done to raise awareness and reassure employees. The success of the Atal Pension Yojana, with its wide reach and robust growth, offers valuable lessons for the PFRDA on how to effectively promote and scale up the new pension scheme to ensure a more secure and dignified future for central government employees.

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