The just-approved Unified Pension Scheme (UPS) will put an additional burden of Rs 6,250 crore on the national exchequer, Union Minister Ashwini Vaishnaw said.

The scheme, which is set to provide assured pensions to 23 lakh eligible central government employees,

will come into effect from April 1, 2025. The UPS plans to increase the government’s contribution from the current 14% to 18.5%. This 4.5% increase is expected to cost the Centre Rs 6,250 crore per year, Vaishnaw said in New Delhi over the weekend.

While the government's contribution under UPS will increase, employees' contributions will remain at 10% of their basic salary.

Additionally, there will be an arrear payment of Rs 800 crore under the National Pension System (NPS) for employees retiring before March 31, 2025. Those retirees who opt for UPS will receive these arrears.

The NPS, which started on January 1, 2004, is a contributory scheme, while the previous pension scheme guaranteed 50% of the last-drawn basic pay, regardless of the accumulated corpus. In contrast, the UPS aims to provide an assured pension based on the length of service, linking payouts to the accumulated corpus.

The Union Cabinet approved the UPS on Saturday, addressing the long-standing demands of government employees, particularly with upcoming assembly elections in Haryana and Jammu and Kashmir.

Employees under the NPS can choose to switch to the UPS, but this decision will be irreversible. Those opting for the UPS will receive an assured pension of 50% of the average basic pay drawn in the last 12 months before retirement, provided they have a minimum of 25 years of service. Employees with less than 25 years of service will receive a proportionate pension, with a minimum qualifying service period of 10 years.

Under the UPS, employees with at least 10 years of service will receive a minimum pension of Rs 10,000 per month upon retirement, and an assured family pension in case of the pensioner's death. The scheme also includes dearness relief, based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to the adjustments for serving employees.

"We are proud of the hard work of all government employees who contribute significantly to 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," Vaishnaw said after the crucial Cabinet meeting.

The introduction of these features signifies a transformation of the NPS, which previously offered pensions based on contributions by employees and the government.

This announcement comes amid several non-BJP states deciding to return to the Dearness Allowance (DA)-linked Old Pension Scheme (OPS) and demands from employee organizations in other states to do the same.

The NPS has been mandatory for all government employees, except those in the armed forces, joining the central government on or after January 1, 2004. Most state and Union Territory governments have also adopted the NPS for their new employees.

To enhance the pension system for government employees, the finance ministry established a committee last year, led by then Finance Secretary TV Somanathan, to review the pension scheme and suggest potential changes. The committee's mandate was to recommend modifications to the NPS to improve pension benefits for government employees, considering the fiscal implications and overall budgetary constraints to ensure fiscal responsibility.

Meanwhile, the Maharashtra government on Sunday announced that it will implement a revised NPS for state government employees, in line with the Union government’s Unified Pension Scheme (UPS).