The Union Cabinet greenlighted the Unified Pension Scheme (UPS) last week after facing criticism over the scrapping of guaranteed pensions provided in the Old Pension Scheme (OPS). OPS was replaced with the National Pension System (NPS) in 2004, which gives pensions based on market-linked returns and employee and employer contributions. Many government employees rejected NPS, claiming inadequate pensions and other issues in the scheme.

For the government, NPS was an answer to the increasing fiscal burden arising due to the large pension payouts annually and meeting the employees’ financial needs in their old age.

Due to the opposition against NPS, many non-BJP-ruled states brought back OPS despite the financial burden on the state exchequer. OPS doesn’t require employees to contribute, and the government bears the entire burden. In NPS, on the other hand, the employer matches the employee’s contribution towards a pension fund, which is then invested in the market. Hence, it has been a long-standing demand for various employee organisations to reinstate OPS.

Now, with the launch of UPS, the debate has shifted on the merits between UPS and OPS. Let us examine the similarities and dissimilarities between these two pension schemes.

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OPS Vs UPS:

What Is Ops?

OPS was the only pension scheme for central government employees until December 31, 2003. From January 1, 2004, NPS replaced it as a default option. Under OPS, employees received an assured pension for a lifetime without their contributions.

What Is UPS?

The newly launched UPS promises an assured pension to the employee for a lifetime, an assured family pension in case of the employee’s death, and an assured minimum pension for those who have been in service for at least 10 years. However, both the employee and the employer contribute to the scheme for building the pension corpus.

Differences Between UPS And OPS:

Defined Benefit And Contribution: UPS is a defined contribution and a defined benefit scheme, whereas OPS is a defined benefit scheme.

Contribution Amount: UPS is a contributory scheme in which the employee and employer both contribute to the pension fund. The employee contributes 10 per cent of the basic salary, while the employer contributes 18.5 per cent of the basic wage. In OPS, neither the employee nor the employer contributes.

Pension Amount: The pension amount in UPS is determined based on the average salary (Basic plus Dearness Allowance) of the last 12 months of service. In OPS, it is 50 per cent of the last drawn salary (Basic plus DA).

For example, if a person’s last drawn monthly salary was Rs 1 lakh, including the DA, the pension would be Rs 50,000 in the OPS model. Likewise, using the same example, if the person got a promotion a few months before retirement and his salary was increased from Rs 70,000 to Rs 1 lakh, his pension in the UPS model would be 50 per cent of the last 12 months’ average salary, which is Rs 42,500. In this case, UPS is less beneficial than OPS. However, if there is no change in salary in the last 12 months before retirement, it would not make any difference.

Minimum Pension: The government assures a minimum pension of Rs 10,000 per month in UPS if the service period is at least 10 years. In contrast, the minimum pension in OPS is Rs 9,000 per month after the 7th Central Pay Commission rules as per the pensioner’s portal.

Lump-Sum Withdrawal: In UPS, the government will pay a lump-sum amount of 1/10th of the monthly payments (Pay + DA) for every six months of service completed at the time of retirement. This amount is in addition to the pension amount. In OPS, there is no lump sum payment provision. However, one can withdraw in a lump sum only by commuting a portion of the pension, reducing the in-hand pension amount.

Gratuity: Gratuity benefits are available in both OPS and UPS. However, OPS has a maximum limit of Rs 20 lakh, whereas UPS has not defined such a limit.

Tax Benefits: As no contribution is required in OPS, there are no tax benefits. However, UPS is a contributory scheme and may offer tax benefits. Currently, there is no clarity on the tax benefits of employee and employer contributions under UPS.

Similarities:

Assured Pension: Both OPS and UPS promise an assured pension to the employee and the family after the employee’s death. An assured pension offers peace of mind because, in other instruments, there could be possible losses.

Inflation Indexation: Both OPS and UPS offer inflation adjustment through indexation. The pension under OPS is revised twice a year (every six months) after the government revises the DA and Dearness Relief (DR). This benefit continues under UPS. Pension inflation indexation will be based on the All India Consumer Price Index for Industrial Workers (AICPI-W).

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While there has been ongoing demand to reinstate OPS, the central government has refused to reinstate it so far as the scheme adds to the treasury burden. Instead, it launched the UPS, which combines the assured pension features of OPS with a contributory framework of NPS. As employees can switch from NPS to UPS only once, they need to select the option carefully.