Difference in Unified Pension Scheme (UPS), National Pension Scheme (NPS), and Old Pension Scheme (OPS)

Why in News? The recent approval of the Unified Pension Scheme (UPS) by the Union Cabinet highlights the government’s effort to balance financial sustainability with providing assured pensions to government employees.

The Unified Pension Scheme (UPS), National Pension Scheme (NPS), and Old Pension Scheme (OPS) are three different pension schemes in India, each with distinct features, benefits, and structures. Here’s a detailed comparison of these schemes:

1. Old Pension Scheme (OPS):

Features:

Defined Benefit Scheme: The Old Pension Scheme is a defined benefit plan, meaning the pension amount is pre-determined and not linked to the contributions made by the employee during their service.

Pension Calculation: The pension under OPS is typically calculated as 50% of the last drawn salary. It also includes provisions for dearness allowance (DA), which is revised periodically to keep up with inflation.

Funding: The OPS is entirely funded by the government, with no contribution required from the employee.

Applicability: OPS was applicable to government employees who joined service before January 1, 2004. Post-2004, it was replaced by the NPS for new entrants in government services.

Guaranteed Pension: OPS offers a guaranteed pension for life, along with benefits to the spouse or dependents in case of the pensioner’s demise.

Pros:

Guaranteed pension amount.

• Adjusted for inflation through DA.
• No financial contribution required from the employee.

Cons:

• Financial burden on the government due to the rising pension liability.
• Unsustainable in the long term due to increasing life expectancy and the number of retirees.

2. National Pension Scheme (NPS):

Features:

Defined Contribution Scheme: NPS is a defined contribution plan, where both the employee and the employer contribute towards the pension fund during the employee’s working life.

Pension Calculation: The pension amount is not fixed and depends on the amount contributed by the employee, the performance of the pension fund, and the annuity purchased at the time of retirement.

Contributions: Typically, the employee contributes 10% of their salary (basic + DA), and the government or employer matches this contribution with an additional 10%.

Market-Linked Returns: The returns on the NPS are market-linked, as the funds are invested in equities, corporate bonds, and government securities.

 Withdrawals: At retirement, the employee can withdraw 60% of the corpus as a lump sum (tax-free), while the remaining 40% must be used to purchase an annuity to provide a regular pension.

Applicability: NPS is mandatory for government employees who joined service on or after January 1, 2004. It is also open to the general public on a voluntary basis.

Pros:

• Portable across jobs and locations.
• Offers market-linked returns, potentially higher than OPS.
• Flexibility in choosing the pension fund manager and investment options.

Cons:

• No guaranteed pension amount; returns depend on market performance.
• Requires financial literacy to make informed choices about fund managers and investment allocations.
• The pension amount may vary significantly based on market conditions at the time of retirement.

3. Unified Pension Scheme (UPS):

Features:

Hybrid Scheme: The Unified Pension Scheme (UPS) is designed to combine the features of both the OPS and NPS, aiming to provide a balanced pension solution.

 Pension Calculation: UPS aims to offer a guaranteed minimum pension like the OPS, while also incorporating market-linked returns from NPS.

Contributions: Like NPS, the UPS involves contributions from both the employee and employer, but with an added guarantee from the government to provide a minimum pension amount.

Market-Linked Returns: Similar to NPS, the funds in UPS may be invested in a mix of assets, offering the potential for higher returns, but with a safety net ensuring a baseline pension amount.

   Applicability: The UPS is a relatively new proposal and is intended to be implemented for future entrants into government services and possibly other sectors. It is still in the discussion and development stages.

Pros:

• Offers the security of a guaranteed minimum pension.
• Potential for higher returns through market investments.
• Addresses concerns of sustainability that plagued the OPS.

Cons:

• Complexity in implementation due to its hybrid nature.
• May require ongoing government support to ensure the guaranteed pension, leading to financial commitments.

Summary:

Old Pension Scheme (OPS): A traditional pension scheme offering guaranteed benefits based on the last drawn salary, but financially burdensome for the government.

National Pension Scheme (NPS): A modern, market-linked pension scheme with contributions from both the employee and employer, offering flexibility but with no guaranteed returns.

Unified Pension Scheme (UPS): A proposed hybrid scheme aiming to balance the guaranteed benefits of OPS with the market-linked returns of NPS, though still in development.