The Union Cabinet on Saturday approved a new Unified Pension Scheme (UPS) for Central government employees, which guarantees a pension amounting to 50% of the average salary earned during the last 12 months of service.

To facilitate this, the government will increase its contribution to the pension corpus from the current 14% to 18.5% of the basic pay and dearness allowance of employees. This change is expected to incur an additional cost of Rs 6,250 crore in the first year. However, the employees' contribution will remain unchanged at 10% of basic pay plus dearness allowance.

The UPS will take effect from April 1, 2025, and will be applicable to all employees who have completed 25 years of service in the government. Key features of the scheme include a family pension for the spouse, which will be equal to 60% of the employee's pension income after their death, a minimum pension of Rs 10,000 for those who have served a minimum of 10 years, inflation indexation to account for the rising cost of goods and services, and the option to withdraw a lump sum amount upon retirement. This announcement by the Cabinet comes over a year after the government formed a four-member committee, led by then Finance Secretary and now Cabinet Secretary TV Somanathan, in April 2023 to review the pension system for government employees.

Prime Minister Narendra Modi stated that the UPS will provide dignity and financial security to government employees. “We take pride in the hard work of all government employees who play a significant role in national progress. The Unified Pension Scheme ensures dignity and financial security for government employees, aligning with our commitment to their well-being and a secure future,” he posted on the social media platform X.

Under the UPS, the pension corpus will be divided into two parts and invested separately. The first part, comprising 10% of the contribution from both the employee and the government, will be invested according to the investment choice made by the individual employee. The second part, equal to 8.5% of the government’s contribution, will be pooled and invested separately.

The assured pension will be determined based on the ‘default mode’ of the investment pattern as notified by the pension regulator, considering full annuitisation of the individual pension corpus. If the benchmark annuity is lower than the assured annuity, the shortfall will be covered. If the employee’s individual corpus generates a higher annuity than the assured one, the employee will be entitled to that higher annuity. However, if the generated annuity is lower than the default mode, the government's top-up through the UPS will be limited to the benchmark annuity.