Rewriting retirement: A new window has opened for pension subscribers

The government has opened a one-time window for employees under the Unified Pension Scheme (UPS) to switch back to the National Pension Scheme (NPS), reshaping retirement choices for millions

Pension fund subscribers in India have got another option to feel confident about their retirement money. This week the finance ministry offered them the option to switch from the Unified Pension Scheme (UPS) to the National Pension Scheme (NPS) in their lifetime.

 

The changes will only affect central and state government employees, who number about 10 million. Beyond them, since pension is a rare privilege for India’s over 500 million workforce, these changes in the pension structure will be watched with keen interest by India’s working-age population.

 

The changes are therefore part of the renewed push from the Pension Fund Regulatory and Development Authority (PFRDA), the regulator for the sector. The regulator is keen to make the modern pension system outscore legacy systems, especially the Employees’ Provident Fund (EPF).

 

The latest move, a government authority on pensions said, was meant to offer comfort to central and state government employees about what they will earn when they retire. It comes on top of several measures taken by the government since last year to make them stay with a contributory pension scheme, rather than demand reverting to the old pension scheme that was totally funded by the government. It is meant to take the sting out of a persisting demand by some government employees to scrap the NPS introduced more than two decades ago in 2004.

 

The measures are progressive. The latest circular issued this week states that all government employees who have signed on to the UPS will be allowed a once-in-a-lifetime choice to opt for the NPS before they retire. The two models are both run under the ambit of the PFRDA.

 

Employees in the private sector are supposed to be subscribers to the EPF. While the EPF rules only mandate that all employees have to subscribe if their salary is less than Rs 15,000 per month, the organisation is able to make even those with salary levels above that remain within the system. The minimum contribution the employees have to make is 8.33 per cent of their salary, while for the employer it is 12 per cent. Both are benchmarked to a Rs 15,000 salary. While the employees can voluntarily contribute more, the employer contribution is capped there. The PFRDA is keen to break into this stronghold. 

 

It has already found traction with the light-touch Atal Pension Yojana (APY) meant for unorganised sector workers. The total gross enrolments under the scheme have crossed 8.11 crore as of August 21, 2025, of which more than 1.17 crore new subscribers were enrolled in FY25. S Ramann, chairperson of the PFRDA, said it has garnered Rs 48,000 crore in assets under management, growing at a CAGR of 9.12 per cent. “It is a robust and sustainable pension product,” he added.

 

The NPS was rung in by the central government in 2004, discontinuing the older pension system under which all government employees got a pension on retirement. The sum was equal to half of their last monthly salary drawn. They had to pay nothing to build up the corpus, which was totally funded by the governments at the states and at the Centre. This was known as the unfunded defined benefit scheme. This had ballooned into a large liability, which made these governments plan a switchover to a sustainable model.

 

The NPS was the response. It is administered by the PFRDA. All central government employees joining from January 1, 2004, are compulsory subscribers to the model. They pay 10 per cent of their salary to the corpus, while the government pays another 10 per cent. In 2019 the government raised its own contribution to 14 per cent of basic pay and dearness allowance.

 

Last year, after some states planned to withdraw from the NPS, the Centre came up with the UPS for employees. It mandates a guaranteed pension for subscribers, a key pain point for them since the NPS does not offer any guarantee. But it is fairly certain that the returns from the NPS will be above this threshold. Yet the government allowed a window wherein employees covered under the NPS could switch to the UPS. 

 

The model not only guaranteed a pension amount of 50 per cent of the average basic salary over the last 12 months before retirement for those with at least 25 years of service, it also allowed employees with a minimum of 10 years of service to get a minimum pension of Rs 10,000 per month when they retired.

 

The latest circular allows these employees to switch back to the NPS, which pension experts are sure will happen. This is because the investment options under the NPS are more flexible. However, the rider is that the employees can exercise this option only once and before they retire.