Sweetened yet sour — Why employees are saying no to UPS

The lack of enthusiasm in Union government employees, reflected in them not exercising the UPS option, seem to have rattled the government into granting so many additional concessions.

On August 24, the Government of India, which until then resisted the pressure from Congress-ruled states reverting to the old pension scheme (OPS), pulled out the rabbit of the Unified Pension Scheme (UPS), in an attempt to assuage the ruffled feelings of employees covered under the National Pension Scheme (NPS).

The NPS employees were offered an OPS-like 50% pension and a lump sum payment of 10% of their pay for every six months of completed service. The UPS was officially notified on January 24, just prior to the Haryana elections, effective from April 1. The existing NPS employees could opt for the UPS by June 30.

The response has been quite poor, with less than 1% of eligible employees reportedly opting for the UPS as the deadline approached. On June 20, the government extended gratuity benefits to those who’ve opted for the UPS. On June 23, the option time was extended to September 30.

There is a kind of rush to sweeten the deal to persuade employees to file opt-ins. Why is the government bent upon making the UPS a clone of the OPS?

NPS, a game changer

The NPS brought a fundamental change in the civil services pension system.

In the OPS, the government paid 50%, adjusted for inflation and pay commission revisions, as a life-long pension. The employees could also commute up to 40% of their basic pension, fully tax-free. The employees did not contribute to this pension, and received their accumulated GPF contributions tax free. They also received a generous gratuity.

The NPS not only discontinued guaranteed pension but also required government servants to pay 10% of their pay and DA as contribution, while the government also paid a similar contribution towards the employee’s NPS corpus. The NPS employees had to convert a minimum of 60% of the corpus into a pension annuity when they turned 60. The remaining corpus, drawn lump sum, is tax-free. There is no inflation indexation of annuities. The pay commission recommendations make no difference to the NPS pension annuities either.

The government has no open-ended and unfunded liabilities in the NPS.

Attempts to make UPS an OPS clone

The NPS had been fully rolled out and stabilised by 2017-2018 with the number of government employees, both at the Centre and the states, crossing 5.7 million; more than one-third of the total strength.

While the NPS cohort did not protest much, the labour unions were uneasy and demanded the return of the OPS. The growing number of NPS employees made politicians interested as well.

In 2018-2019, the Narendra Modi government, after conducting an entirely unnecessary internal exercise to assess whether the NPS corpus could yield 50% of pay as pension annuity, made its first tinkering with the NPS by increasing the government’s contribution to 14%. The Congress-ruled states (Rajasthan, Himachal Pradesh, and Chhattisgarh), beginning May 2022, started reverting to the OPS. The Union government then came up with the UPS, which is a mix of both the NPS and the OPS.

The government's offer of 50% of pay plus DA as pension, the defining feature of the OPS, apparently did not impress the employees or the unions, as reflected in the non-exercise of the UPS option. By making the UPS a prestige issue, the government has already given two additional major concessions.

First, on June 18, it made those opting for the UPS eligible for retirement-cum-death gratuity. Second, on July 4, the government extended tax benefits available under the NPS mutatis mutandis to the UPS, claiming ‘these provisions ensure parity with the existing NPS structure and provide substantial tax relief and incentives to employees opting for UPS’. The tax benefits relate to making employees’ contributions to the NPS/UPS and encashment of the UPS corpus on retirement in a lump sum tax-free.

With these additional benefits, the UPS has become the OPS except for two matters. First, the UPS employees will have to make 10% of their basic pay and the DA as their contribution. Second, the UPS pensions will not be adjusted to take on board pay commission recommendations for the OPS.

Full funding of UPS dicey

The government promised to increase its 10% NPS contribution by 8.5% for the UPS to 18.5% and plans to manage the UPS through a separate fund.

As no actuarial assessment has been done, there is no way to assure that the 18.5% contribution will be adequate to meet the UPS pension liabilities. There is also a danger of the government stopping or reducing its contribution to the UPS fund, making it grossly underfunded, as has been the case with the employees’ pension fund (EPF) for the EPFO-registered employees (no actuarial valuation for years).

In such a case, full funding of the UPS liability will also remain severely doubtful.

Cancel UPS

The lack of enthusiasm in Union government employees, reflected in their not exercising the UPS option, seems to have rattled the government into granting so many additional concessions.

The hard choice currently is to plug the remaining gap between the OPS and the UPS or go back to the pristine NPS.

The NPS is a real, fundamental, and long-term fiscal reform, which does provide the new government servants a fair, albeit less beneficial, option to build a good and flexible retirement corpus, controlled by them.

Instead of making the UPS a clone of the OPS, the government, in the national interest, must cancel the UPS.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.)

Disclaimer: The views expressed here are the author's own. They do not necessarily reflect the views of DH.