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Unified Pension Scheme: Key Challenges and Hidden Drawbacks
Reasons for Cold Response to UPS: Major Concerns and Hidden Flaws
Context: The Unified Pension Scheme (UPS), introduced in April 2024, seeks to address demands for the Old Pension Scheme’s return by offering a guaranteed, inflation-indexed pension.
What is the Unified Pension Scheme (UPS)?
The Unified Pension Scheme (UPS), announced in April 2024, is a hybrid model designed to combine elements of the Old Pension Scheme (OPS) and the National Pension System (NPS).
- Structure: Employees contribute 10% of basic pay, while the government contributes 18.5%.
- Benefits: Provides 50% of average basic pay of the last 12 months as assured pension for those completing 25 years of service. It is indexed to inflation.
- Minimum Pension: ₹10,000/month for those with at least 10 years of service. On death, the family pension equals 60% of the last drawn pension. Unlike OPS, the pension amount under UPS will not be reset after Pay Commission revisions.
Why was it introduced?
The UPS was introduced following sustained demands from employees’ unions and political parties to restore the OPS, scrapped in 2004 and replaced by the market-linked NPS.
- Context: OPS was fiscally unsustainable; pension expenditure of states rose from ₹1.8 lakh crore in FY15 to ₹5.2 lakh crore in FY24 (RBI Study on State Finances, 2024).
- Purpose: UPS sought to address discontent with NPS by ensuring predictable, inflation-linked pensions, while avoiding the heavy fiscal burden of OPS.
- Policy Balancing: Economic Survey 2023-24 highlighted the need for a “sustainable yet socially secure pension framework,” making UPS a middle path.
What are its implications?
- Fiscal Impact: Additional outgo is estimated at ₹8,500 crore in FY26, considered manageable (Finance Ministry). As retirees under UPS rise after 2036, unused pension capital from deceased employees is expected to augment government resources.
- Employee Response: Uptake remains extremely low—just 1.35% of 2.3 million employees (PFRDA, 2025). Reasons include long service requirement, lack of clarity on death/disability benefits, compulsory contributions, and limited flexibility compared to NPS.
- State-Level Experience: States reverting to OPS (Punjab, Rajasthan, Himachal Pradesh) are already facing unsustainable fiscal stress, validating RBI’s warning that OPS-type models increase medium-term liabilities.
Why has UPS found few takers?
- Preference for OPS: Seen as a more secure, non-contributory, defined-benefit system.
- Distrust in UPS: Exclusion of certain groups (e.g., autonomous institutions like Delhi University) and irreversible switching provisions deterred adoption.
- Comparative Global Models: Countries like China (2015) and Thailand have moved to defined-contribution systems, often raising retirement age or contribution rates to ensure sustainability. UPS is aligned with this shift but faces skepticism in India’s socio-political context.
