Superannuation rule in UPS likely to discourage early retirement: Experts

Experts say that criterion may increase labour force participation

Central-government employees who opt for the Unified Pension Scheme (UPS) will start getting pension only at the age of superannuation, which is 60 years, even if they retire before that. 

Experts are of the view this will discourage early retirement and increase labour-force participation.

  Under the current National Pension System (NPS), the superannuation date doesn’t matter for drawing pension because there is no assured pension and it is market-linked. 

The finance ministry on Saturday notified the UPS, cleared by the Cabinet in August last year, paving the way for its implementation from April 1, 2025, benefiting over 2.3 million central-government employees. 

“The eligibility for assured-pension benefits under the UPS is restricted to those who attain the age of superannuation, which is 60 years for central-government employees. That is the only reform introduced under the UPS,” said Mukesh Anand, associate professor, National Institute of Public Finance and Policy.   

Under the Old Pension Scheme (OPS), one had to serve 20 years to be able to draw a full pension. In the case of the UPS, it has been raised to 25 years. Under the OPS, the monthly assured pension was 50 per cent of the average basic pay for 10 months immediately prior to superannuation, while in the case of the UPS it has been raised to 12. In the OPS, the employee starts drawing a pension as soon as the person retires. 

“That is the right thing to do because it is supposed to be an old-age income security. It encourages labour-force participation and discourages exiting the service early,” Anand said. 

For example, if a person opts for a voluntary retirement scheme (VRS) under the UPS at 50, he or she will receive gratuity and other lump sum benefits but not the pension. The amount would be proportionate for a shorter service period, down to a minimum of 10 years of service. 

However, Anand said it was not clear whether the UPS would be wage-indexed though it had been made inflation-indexed.

“The pension of a retired person was also indexed to the productivity of the new employee under the OPS. There is no clarity for the UPS. In case the UPS is also wage-indexed, this does very little to reduce the trend rate of growth of pension expenditure of the government,” he added. 

The government’s contribution under the UPS has been increased from 14 per cent to 18.5 per cent of the basic pay and dearness allowance while the employee contribution will remain at 10 per cent. 

The Cabinet had decided that the UPS would be available as an option to central-government employees. The existing and future employees will also have the option of joining the NPS or UPS. The choice, once exercised, will be final. Provisions of the UPS would also apply to past retirees under the NPS. 

“There will be hardly anyone who will find the NPS worth considering now. Everyone will be shifting to the UPS and they will opt for the default (investment) option,” Anand said.   

According to the government, expenditure for arrears will be Rs 800 crore. The annual cost increase will be around Rs 6,250 crore in the first year. 

In March 2023, the government had set up a committee led by T V Somanathan, then finance secretary and now Cabinet secretary, to explore ways to improve pension benefits under the NPS without reverting to the OPS, which has been deemed fiscally unsustainable.