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The assured minimum pension under Unified Pension Scheme (UPS) will be based on ‘Default mode of Investment’ options for subscribers. Also, under the new scheme, the entire pension corpus will be divided into two funds.
Under the default mode, funds are allocated by the PFRDA among the three public sector undertaking fund managers (SBI Pension Funds Private Ltd, UTI Retirement Solutions Ltd and LIC Pension Fund Ltd). Each of these managers will invest funds in the proportion of 85 per cent in fixed income instruments and 15 per cent in equity and equity related instruments.
The Union Cabinet on Saturday approved UPS with minimum assured pensions based on certain conditions. To be implemented from April 1 next year, the new scheme will be an option to National Pension System (NPS) for government servants who have joined the service on or after January 1, 2004 or who will be joining now onwards with the facility of one-time switch from NPS to UPS. As on date, nearly 23 lakh Central Government employees can avail themselves of UPS.
Under the new scheme, while the government contribution will be raised to 18.5 per cent from 14 per cent, there will be no change in the employee contribution at 10 per cent of basic pay plus DA (Dearness Allowance).
Pension corpus
According to officials, the pension corpus will be divided into two funds. First will be an individual pension fund to which the employee contribution and matching government contribution will be credited and amount will be invested as per the choice of investment made by the individual employee. Second will be a separate pool corpus with additional government contribution alone (8.5 per cent of basic and DA of all employees) and invested separately.
“Assured pension will be based on the ‘default mode’ of investment pattern notified by PFRDA (Pension Fund Regulatory and Development Authority) considering full annuitisation of individual pension corpus,” an official explained.
Apart from the default option, a 2019 notification prescribes three other options for investment choices. Government employees who prefer a fixed return with minimum amount of risk may be given an option to invest 100 per cent of the funds in government securities (Scheme G). Those who prefer higher returns may be given the options of the two life cycle-based schemes – Conservative Life Cycle Fund with maximum exposure to equity capped at 25 per cent and Moderate Life Cycle Fund with maximum exposure to equity capped at 50 per cent. Under the UPS, employees will have the option to choose the investment option for first fund.
Investment choice
“The employee can exercise an investment choice for the individual pension corpus alone. The employee can withdraw up to 60 per cent of the individual pension corpus with proportionate reduction in assured pension,” an official said. This means, more than 40 per cent investment in annuity plan could result in higher pension under UPS.
How will the assurance of a minimum pension work? The official explained that in case the benchmark annuity is lower than the assured annuity, the shortfall will be made good. In case, the individual employee corpus generates higher than assured annuity (based on investment choice exercised by the employee), the employee will be entitled to such higher annuity. In case, the annuity generated is lower than the default mode, the top-up provided by government through UPS will be limited to the benchmark annuity.
UPS: Points to ponder
- Assured pension: 50% of the average basic pay drawn over the last 12 months prior to superannuation for a minimum qualifying service of 25 years. Proportionate for lesser service period up to a minimum of 10 years of service.
- Assured family pension: @60% of pension of the employee immediately before her/his demise.
- Assured minimum pension: ₹10K/month on superannuation after minimum 10 years of service
- Dearness relief on assured pension/family pension/minimum pension
- Lumpsum payment at superannuation in addition to gratuity, this will not reduce the quantum of assured pension
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