A new pension program is set to provide advantages for employees of the central government.

 The Union Cabinet, under the leadership of Prime Minister Narendra Modi, approved a new pension policy on Saturday that will benefit approximately 2.3 million central government employees. This policy introduces a framework that guarantees a monthly payout equivalent to 50% of the basic pay, addressing the concerns of federal staff unions that have advocated for assured retirement benefits.

In April 2023, Modi established a committee chaired by the then Finance Secretary, TV Somanathan, to revise the existing pension system, known as the New Pension Scheme (NPS). This initiative was prompted by widespread dissatisfaction, which escalated into a political issue, leading some opposition-led states to revert to the older, financially burdensome Old Pension Scheme (OPS).

The newly introduced system, termed the Unified Pension Scheme (UPS), will provide 50% of the average basic pay earned by a federal employee during the 12 months preceding retirement, contingent upon the completion of 25 years of service. The UPS is set to be implemented on April 1, 2025.

This development addresses a significant demand from the joint consultative machinery, a forum designed to facilitate dispute resolution between federal staff and the central government. Under the UPS, employees with service between 10 and 25 years will receive a pension on a proportional basis.

Additionally, the UPS will include family or survivor pension benefits, which will be fixed at 60% of the last-drawn pension of a deceased employee. Those retiring with a minimum of 10 years of service will be entitled to a guaranteed monthly pension of ₹10,000.

The UPS will be linked to the Consumer Price Index for Industrial Workers (CPI-IW), a measure of price changes compiled by the labor bureau. The CPI-IW will be utilized to determine dearness relief, a benefit provided to pensioners to mitigate the effects of inflation. Employees who retired since 2004 will have the option to choose the UPS, while the choice to remain under the NPS will still be available. According to an official statement, employees who joined service prior to April 2004 will continue to be governed by the OPS, which guarantees a fixed pension amounting to 50% of their last drawn salary upon retirement.

On October 18, 2023, HT reported that the pension committee has opted to recommend a system that guarantees a monthly payout while dismissing the possibility of reverting to the Old Pension Scheme (OPS).

"We take pride in the diligent efforts of all government employees who play a crucial role in advancing our nation. The Unified Pension Scheme is designed to provide dignity and financial stability for government employees, reflecting our dedication to their welfare and a secure future," stated Modi in a post on X on Saturday.

"Pension benefits upon retirement are a significant aspect of social security. Government employees have been advocating for reforms to the National Pension System (NPS). In response, the Prime Minister established a committee that conducted thorough consultations," said Information and Broadcasting Minister Ashwini Vaishnaw during a press briefing.

The NPS, which is a market-linked and fully funded system, was introduced as a significant fiscal reform in 2004, replacing the previous OPS that was financially burdensome due to its unfunded nature. Under the NPS, funds are allocated to equities, and the returns from these investments determine the pension amount. Thus, the pension under the NPS is contingent upon market performance.

A fully funded pension scheme is characterized by annual budget allocations that can fulfill both current and future financial obligations based on investment returns and mandatory contributions.

Somanathan indicated that in the inaugural year of the Unified Pension Scheme (UPS), the government anticipates that arrears will amount to ₹800 crore, while the estimated annual pension cost for increasing the government’s contribution from 14% to 18.5% is projected to be ₹6,250 crore. The government’s contribution will be reassessed "every three years," Somanathan noted. Arrears will be disbursed to all retirees transitioning to the UPS, adjusted for any amounts they have already received under the NPS. Eligibility for arrears will be limited to those who retired after 2004.

On August 5, HT reported, citing a committee member, that the old pension scheme was deemed “not viable, financially unacceptable, and not feasible.” It was stated that this scheme would have been detrimental to the average citizen, as it would have consumed a significant portion of the government’s budget that ought to be allocated for the welfare of the populace.

Under the new UPS, the government will contribute 18.5% to an employee’s retirement fund, while the employee's contribution remains fixed at 10%. “The government has raised its contribution from the current 14%, and a notable advantage of the UPS is that it guarantees a 50% return, thus shielding it from market fluctuations,” Somanathan remarked.

During consultations with stakeholders, numerous states expressed interest in implementing the UPS, according to an official. “Even states like Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh, which had opted to revert to the OPS for their state government employees, may also consider adopting the UPS,” he added.

In her presentation of the Union Budget on July 23, Union Finance Minister Nirmala Sitharaman stated: “The Committee reviewing the NPS has made significant progress in its work. I am pleased that the staff side of the National Council of the Joint Consultative Machinery for Central Government Employees has adopted a constructive stance. A solution will be developed that addresses the pertinent issues while ensuring fiscal responsibility to safeguard the interests of the common citizens.”

Congress leader Rashid Alvi commented that the government should have made this decision much earlier. “They are acting now under pressure. The entire opposition has been advocating for the government to take action regarding pensions... retired employees should receive pensions based on their pre-retirement salaries, not merely 50% of their salary, but rather 100%,” he asserted.