Unified Pension Scheme balances fiscal cost and aspirations of employees: Economists

Central government employees will move quickly to UPS as their contribution remains the same at 10 percent and the government is adding a 4.5% contribution.

The Unified Pension Scheme (UPS) cleared by Cabinet balances out the fiscal cost and aspirations of employees through an assured return and all the central government employees will quickly shift to it, economists said.

“UPS balances aspirations of government employees where a lot of uncertainty was there with the New Pension Scheme (NPS) and apprehensions of huge fiscal cost that some states were taking by reverting to OPS. The committee has tried to find a balance between fiscal cost and social security issues and aspirations of employees,” economist N R Bhanumurthy told Moneycontrol.

The fiscal impact will have to be estimated differently because it is not yet known if all the state governments will go with it, he said.

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On the face of it, central government employees will move quickly to UPS as their contribution remains the same at 10 percent and the government is adding a 4.5 percent contribution. Under UPS, the government will increase its contribution from 14 percent in NPS to 18.5 percent to support the implementation of the UPS.

“Overall pension fund will increase under UPS as the market-determined return under NPS is the black box,” Bhanumurthy said.

Since the NPS is linked to the market, the exact corpus of the fund cannot be known. Under UPS, which will have assured return, the corpus of the pension fund is expected to increase.

The increased cost of living will also be taken care of under UPS as real pension will not change because it's indexed into inflation. In NPS, if inflation goes up, real pension goes down.

“Old Pension Scheme (OPS) to NPS was a very sharp shift. It is addressed now by the UPS,” he added.

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OPS was based on the defined benefit scheme. The benefits were clearly defined and there was certainty about the post-retirement income flows. Whereas in NPS, it’s a contributory benefit scheme. The employee must forgo some current income to create a pension fund which in turn will provide him post-retirement income flows. Since this pool of funds is invested in the market, the returns are also conditional upon market risks and uncertainties.

“The UPS tries to address the issues by combining both the elements of OPS (the defined benefit) and NPS (contributory) systems. The employees will contribute and make a pool to fund the post-retirement annuity but the new element here is that the Union government has created a defined return on the pool. In this way, the risks and uncertainties associated with NPS are eliminated,” National Institute of Public Finance and Policy (NIPFP) economist Srihari Nayudu told Moneycontrol.

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“The regular pension scheme does not cover the employees working in autonomous institutions under Government of India. However unified pension scheme is wider in scope and offered to the autonomous institutions," NIPFP professor Lekha Chakraborty told Moneycontrol.