TK Arun
Those risk-averse and unsure how to deploy lump sum received during superannuation would be better off with UPS; others should stick with NPS
The government has notified the Unified Pension Scheme (UPS), a scheme announced months ago, in the wake of concerted demands from government employees around the country to revert to the Old Pension Scheme (OPS), abandoning the National Pension Scheme in force since January 1, 2004, for all those who joined the Central government service on that day or afterward. Most state governments have since also migrated their new employees to the NPS, seeing the OPS as an unaffordable luxury.
Both UPS and NPS are less generous to employees than the OPS had been but are more sustainable, from the government’s perspective, than the OPS. Most employee unions would clamour, once again, for OPS. The more realistic course is to make a rational choice between UPS and NPS. Since UPS offers protection against inflation, many would be tempted to reach for that umbrella but retirees would be better off sticking with the NPS.
Governments and pension
Sustainability of a government pension might sound strange — after all, the government can always borrow to find the resources to pay for anything it pleases.
There are serious limits on how much a state government can borrow, and often, states fail to honour pension commitments on time. Former employees of state transport corporations, for example, find that the corporation would prioritise buying fuel to keep their buses running, over paying pensions, with the state government, implicit guarantor of the pension, incapable of bailing the corporations out.
Even for the Centre, it is not the case that there are no constraints on borrowing. High levels of borrowings can cause macroeconomic stress, leading to inflation, rating agency disapproval and a rise in the cost of borrowing, leading to higher costs of borrowing for companies.
Pension burden
Ever since successive pay commissions began to raise civil service pay to bring it to market parity, and pensions of past employees were revised upwards to bring them up to 50 per cent of the new, Pay Commission-recommended pay slabs for serving employees of equivalent rank, the pension burden has turned significant.
Governments have to squarely face the question: Is paying pensions the best way to spend scarce government funds, so as to maximize collective welfare? What if pension payments are made at the expense of, say, defence outlays or R&D vital to maintaining strategic autonomy in a world of hegemonic big powers?
Paying for pension
This is why the government introduced funded pensions for civil servants as has been the norm for decades in many rich countries. This would put an end to the practice of dipping into current revenues to pay for past as well as serving employees.
Today, in Britain, even the pensions of its armed forces personnel are funded, jointly by the soldiers during their service and by the government. The government, in addition, sets aside money for a top-up, in case the pension payout fails to neutralize the effect of inflation. It is this model the government has adopted for the UPS.
How do they match
The NPS and the UPS are funded pensions, without the need for the government to dip into current revenue to pay pensions.
How do benefits under the two systems compare?
| Feature | NPS | UPS |
| Revisions on basis of future pay commission awards | None | None |
| Certainty about monthly payout | For monthly payout received from annuity purchased with 40% of saved corpus | For monthly pension at 50% of average monthly basic pay (NOT basic pay plus allowances) of final 12 months, adjusted for length of service and missed contributions/withdrawals |
| Assured protection against inflation | No | Yes |
| Lump-sum payout | Lump-sum amounting to 60% of saved corpus, tax-free, to be invested per retiree’s wishes. Retirees can keep this amount in NPS itself, and continue to earn returns per preference for allocation among asset classes and asset managers. | Lump sum received is 10% of (basic + DA) at time of retirement multiplied by number of 6-month periods of service (years of service X 2). Eg: If someone served for 20 years, 4 months’ worth of basic + DA will be given. |
| Government’s contribution | Govt contribution of 14% of salary to retirement corpus to accumulate along with employee’s contribution of 10%. | Govt contribution to retirement corpus will rise to 18.5%. But that’s of little operational significance for employee. Govt’s funding of general pension pool is to create resources to provide inflation relief. |
UPS and OPS
Is the UPS a fair approximation of the Old Pension System? It is not. There are no revisions of the pension amount as per Pay Commission Awards for employees in service, as is the case with the OPS.
UPS offers certainty of receiving half the basic pay at the time of retirement, protected against inflation, provided the retiree has served the full qualifying service period of 25 years, made all due contributions and has not made partial withdrawals. Proportionate reduction in the pension amount would be made for shortfalls in length of service and contributions.
DA to be affected
With the finding of monthly household consumption expenditure surveys that the share of food is coming down in the consumption basket of all income classes, it is likely that the government would bring down the weight for food in the consumer price index from the 49 per cent where it stands now. Food and fuel are the most volatile elements of the consumer price index. Inflation as measured by the CPI, which is used to calculate DA, is likely to come down in the future, and so also the value of hedging against inflation.
Can NPS subscribers protect their post-retirement incomes from inflation on their own? If they wish to stick to traditional saving assets such as fixed deposits, probably not, because they lock themselves into rates that stay fixed, even as climbing inflation erodes the return after adjusting for inflation.
Choice for retirees
If the retiree has the savvy to identify assets that appreciate with or faster than inflation, they would be protected. Company dividends go up with inflation, so do rents. Many stocks appreciate much faster than inflation, but stocks carry the risk of coming down sharply as well. A diversified portfolio of stocks, bonds, exchange-traded funds (including real estate investment trusts or REITS) can offer protection against inflation and much more.
Those who are risk-averse and unsure of how to deploy the lump sum received from the NPS at the time of superannuation would be better off with the UPS. Others should stick with NPS.
Firms set for spectacular growth
India is a growing, urbanizing economy. Even for those who fear that India would be caught in the so-called middle-income trap, it should be a fairly risk-free assumption that growth would taper off only after the current per capita income of around $2,500 has at least quadrupled. That means diverse companies across the spectrum of sectors would see spectacular growth.Diversifying investment allocations across asset classes and across sectors is the way to minimize risk and maximize returns. Those who have faith in India’s growth story but do not know how to choose the right way to capture it with their investments should get professional help. NPS will let you ride India’s growth; UPS will keep you safe but grounded.
TK Arun is a senior journalist based in Delhi.
This article was first published in The Federal as Why you should pick National Pension System over Unified Pension System on 28 January 2025.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organization.
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Acknowledgment: This article was posted by Reetwika Mallick, Visiting Researcher and Assistant Editor at IMPRI
