Will UPS benefit government employees or harm them? Click to clear all the confusion

The Union Cabinet has approved a new Unified Pension Scheme (UPS) for government employees, which will significantly increase their pension benefits. The government's contribution under this scheme will increase from 14% to 18.5%. Calculations done by UTI Pension Fund show that for employees with a monthly salary of Rs 50,000, this increase will increase pension benefits by about 19%, with their corpus growing by about 3% annually. However, the annual compounded growth of 8% is less than the returns provided by three pension fund managers. This corpus can be even bigger as it does not yet include dearness allowance or pay commission awards received during the service period. Similarly, the monthly pension payment will not include dearness relief (DR).

Currently, there are three pension fund managers for government employees: SBI, LIC, and UTI. Data from the NPS Trust website shows that since its inception in April 2008, the SBI Pension Fund has delivered the highest return of 9.75% for central government employees, while the LIC Pension Fund has delivered a return of 9.56% for state government employees since June 2009. The UTI Pension Fund calculation is based on a 6% annual return on annuity, while insurance companies currently offer returns between 5.6% and 7%. Government employees have three investment options: the default option, which is used by 95% of subscribers, allows 65% investment in government securities, 15% in equities, and 20% in corporate bonds.

The second option is to invest entirely in government securities, and the third option, the Moderate Life Cycle Fund, allows individuals below 35 years of age to allocate 50% of their corpus to equities, 30% to corporate bonds, and the remaining 20% ​​to government securities. As the client ages, the equity allocation decreases by 2% annually until age 55, after which 80% of the corpus is invested in government securities, and the remaining 20% ​​is split between equities and corporate bonds.

The fund managers noted that to maintain a pension equivalent to 50% of the average salary over 12 months, a larger corpus is needed, which is why the government contribution was increased to 18.5%. The employee contribution remains at 10%. If market returns decline in the future, the government may need to increase its contribution. D. Swarup, former chairman of the Pension Fund Regulatory and Development Authority, noted that UPS is beneficial for retirees, but it may limit their potential for high returns. For many government employees, the guaranteed 50% return seems like a safe bet.