The Unified Pension Scheme (UPS) is a new system designed to provide central government employees with a minimum guaranteed pension of Rs 10,000 if they choose to participate. In a notification issued on January 24, 2025, the Finance Ministry outlined the criteria and formula for calculating the pension amount for those who opt into the scheme. The UPS is set to take effect on April 1, 2025, for both existing and future employees. It is also available for those retired under provisions of FR 56 (j) and 'in case of voluntary retirement after a minimum qualifying service period of 25 years', reads the notification. Note that retirement under FR 56 (j) is not a penalty as per Central Civil Services (Classification, Control, and Appeal) Rules, 1965).
UPS: Potential Takers
According to the government, the new system will benefit around 23 lakh central government employees. Currently, NPS is the default pension system for central government employees, but now there will be a UPS option as well, albeit it will remain a once-in-a-lifetime choice. Once chosen, reverting to NPS will not be permitted. According to the notification, there will be a minimum guaranteed pension of Rs 10,000 per month for individuals who complete a qualifying service of 10 years or longer, meeting other conditions.
This highly sought-after guaranteed pension is a key attraction for the UPS among potential beneficiaries, and guaranteed pension under the old pension scheme (OPS) has historically been one of the main reasons people choose to join government jobs. Although guaranteed pension has returned in a somewhat diluted form as UPS, it is likely that many individuals will still consider it. Additionally, another reason for the acceptance of UPS could be the availability of the National Pension System (NPS) under the 'All Citizen Model.'
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How To Calculate Pension Under UPS?
The formula: UPS Pension = (P/2 ) * (Q/300) * (IC/BC)
*Here, 'P' is the Average basic pay, 'Q' is the number of months of contribution, 'IC' is the Individual corpus, and 'BC' is the Benchmark corpus. The denominator 300 is the number of months of the service (25 years*12 months).
Service Period More Than 25 Years
For an employee who has completed 25 years of service, this is how the pension will be calculated. For example, the employee’s average basic salary over the last 12 months before retirement is Rs 1,00,000, and the completed service period is 25 years. The employee contributes 10 per cent for all 25 years (300 months). The monthly pension would be, Rs 50,000 plus dearness relief (DR). This is with the assumption that the individual corpus (IC) is equal to the benchmark corpus (BC).
It is still unclear how the benchmark corpus will be determined. As per the notification, the Pension Fund Regulatory and Development Authority (PFRDA) will determine the rules for computing it. The PFRDA issued the draft regulations, ‘PFRDA (Unified Pension Scheme) Regulations, 2025,’ on January 27, 2025, regarding the UPS framework and its operationalisation.
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What Is Benchmark Corpus?
According to the draft regulations, “Benchmark Corpus” means the corpus value as determined by the Authority and computed for comparison with individual corpus based on the following assumptions: (i) regular and timely receipt of applicable contributions of both, employer and employee for each month of qualifying service, as specified under sub-regulation (1) and (2) of regulation 11, (ii) contributions being invested in default pattern; and (iii) there being no partial withdrawals during accumulation phase”.
These sub-regulations are:
“The monthly contribution of the UPS subscriber shall be ten per cent of the basic pay and dearness allowance thereon or such percentage determined by the Central Government, which shall be credited to the individual PRAN of UPS subscriber”.
“The monthly contribution of the UPS subscriber shall be matched by the Central Government by crediting an equal amount, or such other amount, to the individual PRAN of the UPS subscriber”.
However, more clarity is needed on this part. As Vivek S.G., a certified financial planner and founder of Wealth Crafts, a Sebi-registered investment advisor, states, “As I get into this, I feel they may come up with a FAQ around the Benchmark”.
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Service Period Is Less Than 25 Years But More Than 10 Years
If the service period is less than 25 years but more than 10 years, the pension will be calculated based on the same formula. However, due to less number of service years, the pension will be reduced.
So, in the same example, keeping everything else the same, but reducing the number of working years to 20, the pension amount would be Rs 40,000 plus DR. Similarly, for 15 years of service, the pension will be Rs 30,000 plus DR.
However, in case partial withdrawals are made or there have been some missing credits, the pension amount would also become less, because of the lower IC than the BC.
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Minimum Guaranteed Pension:
An employee who retires after 10 years of service, will be given an assured pension of Rs 10,000, with the condition that the contributions have been made regularly. If withdrawals were made or credits were missing and the pension calculated as per the formula comes out less, then in that case, that lesser amount will be paid and not the minimum assured amount.
Notably, employees will have the option of replenishing a shortfall in the IC compared to the BC sometime later, if they have partially withdrawn some amount or a contribution is missed. This will restore their full pension as per the formula.