UPS: Central staffers may get to keep higher returns from riskier bets

Employees could choose the investment plan of their choice based on their contribution and 10% contribution by the government

Central government employees could get higher returns under the Unified Pension Scheme (UPS) than guaranteed since they will get an option to choose an investment plan out of their funds and 10 per cent government contribution (of a total of 18.5 per cent), government sources said.

While the government has increased its contribution from 14 per cent under the new pension system (NPS) to 18.5 per cent of the basic pay of employees under UPS, individual’s contribution has been retained at 10 per cent.

Employees could choose the investment plan of their choice based on their contribution and 10 per cent contribution by the government. 

Otherwise they can go with the default option, which invests money in debt and equity in a predetermined manner.

Separately, a pool fund would be created with 8.5 percentage points of government contribution, which would be invested by the government. 

This fund would be used to meet any shortfall or top-up towards the payment to an individual on retirement, the sources said.

The gap between half of the basic pay that the individual will get on retirement and the money pool that accumulated from investments would be calculated on return to the default option. 

If the individual gets higher money because of higher returns on his preferred investment options than the default one, the extra sum will go to his account.

“There are equity investment plans that are riskier but could give better returns. If an individual opts for these instead of the default option, then it would be his/her gain,” the government official explained.

The Scheme was approved by the cabinet on August 24, with an assured pension of 50 per cent of average basic pay over the last 12 months before retirement for a minimum qualifying service period of 25 years.

“There is a cost to the UPS because it has a guarantee. The risk cover is the additional cost being covered by the government. 

But there are no carry-forwards or off-budget borrowings,” the government source said.

The Scheme also includes an assured minimum pension of Rs 10,000 per month on superannuation after minimum 10 years of service.

Fiscal math

Explaining the fiscal burden, the chairman of the pension review committee TV Somanathan explained that the 18.5 per cent prospective contribution includes the cost of the existing staff who are within the NPS. 

“The amount required for the earlier years for the staff already in the scheme is factored into this 18.5 per cent calculation,” Somanathan said.

The fiscal impact in year one of the Scheme is expected to be around Rs 6,250 crore plus Rs 800 crore arrears for those already retired in the past and who are not included in the 18.5 per cent calculation. 

“There will be no other cost or one-time impact,” Somanathan added.

Major Tweaks

> Centre’s contribution rises from 14% of basic pay under NPS to 18.5% under UPS

> Employee contribution to remain 10% 

> An employee can opt for an investment plan of their choice 

> They can also choose the default option which invests in debt and equity 

> Pool fund to help meet shortfall in assured sum payable to individuals on retirement