NEW DELHI: The Union Cabinet on Saturday approved a comprehensive reform of India’s pension system. The introduction of the Unified Pension Scheme (UPS) is scheduled to come into effect on April 1, 2025. The move is intended to address widespread dissatisfaction with the new National Pension Scheme (NPS) and provide government employees with a more stable retirement plan.

The UPS introduced several important changes aimed at providing more predictable and stable pension benefits to government employees. Unlike the NPS, which offers a variable pension based on market-linked returns, the UPS guarantees a fixed pension amount. Pensioners will receive 50% of their average basic salary from the last 12 months before retirement, provided they have completed at least 25 years of service. For those with less than 25 years of service but at least 10 years of service, the pension will be adjusted proportionally.

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In addition to the guaranteed pension, UPS guarantees a minimum pension of ₹10,000 per month for employees who retire after at least 10 years of service. Family members of deceased pensioners receive a family pension of 60% of the last pension received. To counter inflation, these pensions are adjusted based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to the adjustments for active employees.

Another notable feature of the UPS is the lump sum payment on retirement, calculated as 1/10th of the monthly remuneration (salary plus cost-of-living allowance) for every six months of completed service, in addition to the standard severance pay. This reform is expected to benefit around 2.3 million central government employees, and the possibility of adoption by state governments could extend it to over 9 million employees across the country.

The UPS also benefits former pensioners under the NPS, with arrears paid out at Public Provident Fund (PPF) rates. Employees have the option to choose between the NPS and the UPS, with the government increasing its contribution to the scheme from 14% to 18.5% without increasing employee contributions.

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The introduction of the UPS is a direct response to growing criticism of the NPS, which was introduced in 2004 as a reform to replace the Old Pension Scheme (OPS). The OPPS offered a guaranteed pension but became financially unsustainable due to rising pension liabilities. The NPS, on the other hand, was a funded scheme with contributions from both the workers and the government but did not offer guaranteed returns, leading to widespread discontent among workers.

Political considerations also play a role in this reform. Opposition parties have taken advantage of dissatisfaction with the NPS, prompting several states to revert to the OPS. The UPS is seen as a strategic move by the central government to garner support ahead of the crucial assembly elections in Jammu & Kashmir, Haryana, Maharashtra and Jharkhand.