UPS serves fiscal stability, and retirees’ interests

Aug 26, 2024 09:00 PM IST

The burdens of the Old Pension Scheme (OPS) were universally acknowledged as unsustainable, a debt trap that threatened to undermine the financial stability of the country. It led to growing pension liabilities, consuming an increasing share of government revenues, and posed a long-term risk to the fiscal health of the nation.

In response, the National Pension System (NPS) was introduced by the Atal Bihari Vajpayee government in 2004, marking a shift to a defined-contribution model where both employees and the government contributed 10% of the employee’s basic pay plus dearness allowance (DA) into a retirement fund. This fund was invested in a mix of market-linked instruments, and the returns determined the pension amount. Although this system brought much-needed fiscal discipline and reduced the government’s unfunded pension liabilities, it also introduced uncertainty for retirees, as the pension was dependent on market performance. For instance, during market downturns, retirees saw lower returns, raising concerns about their financial security.

The NPS did not escape the clutches of political manipulation, particularly by the Congress. Initially, the Congress lauded the NPS as a necessary and prudent measure, with former PM Manmohan Singh endorsing the shift towards a more sustainable pension model. Yet, when the winds of political expediency blew in a different direction, the Congress abandoned its principles. This inconsistency in policy stance severely damaged the credibility of the NPS.

Against this backdrop, the UPS addresses the critical issues of both the OPS and NPS while ensuring long-term economic stability. Under the UPS, retirees will receive a pension equivalent to 50% of their last drawn salary plus DA, similar to the OPS. However, unlike the OPS, the UPS incorporates elements of the NPS by requiring employees to contribute 10% of their basic pay plus DA towards their pension fund, ensuring a balanced sharing of the financial burden.

The UPS also introduces an innovative feature where retirees receive a lump-sum payment equivalent to one-tenth of their monthly emoluments for every six months of completed service. This not only provides immediate financial relief but also offers flexibility, something the OPS lacked. Additionally, the UPS includes provisions for inflation indexation, ensuring that pensions increase in line with DA revisions, thus protecting retirees from the erosive effects of inflation — an improvement over the NPS, which did not offer such protection.

The UPS introduces a minimum pension guarantee of ₹10,000 per month, ensuring that all retirees, irrespective of their service duration, receive a dignified pension. This addresses the concerns raised under the NPS, where the lack of a minimum pension left many retirees with inadequate financial support. For example, a government employee who retires after ten years of service will now receive at least ₹10,000 per month, safeguarding them from financial insecurity. In case of death during service, the family pension under UPS is fixed at 30% of the pension amount, providing adequate support to the deceased employee’s family. This contrasts with the NPS, where family pension calculations were more complex and often less generous.

The introduction of the UPS is rooted in a deep understanding of India’s economic landscape and the challenges that lie ahead. PM Modi’s leadership in steering this policy is a testament to his commitment to long-term reforms over short-term populism. One cannot help but admire the courage and foresight involved in crafting a policy like the UPS. It is a move that transcends political expediency, focusing instead on building a sustainable future for the nation. The UPS exemplifies the present dispensation’s broader intent to transform India’s financial and social security landscape and ensure that it is both inclusive and resilient. It is a manifestation of visionary leadership that looks beyond immediate gains to secure a prosperous future for all citizens. It is a scheme that unifies the best elements of past pension systems while addressing their flaws, ensuring that India’s retirees can live with dignity and financial security.

As we move forward, it is crucial for all stakeholders to support this initiative, recognising that the UPS is a well-calibrated response to the challenges posed by both the OPS and the NPS. The UPS is more than a pension scheme — it is confident stride towards a unified and secure future for India. This is a decision that will be remembered as one of the most transformative in India’s journey towards becoming a developed nation.

Hitesh Jain is managing partner, Parinam Law Associates, and vice-president, Mumbai BJP.The views expressed are personal