Finance Minister Nirmala Sitharaman has firmly stated in the Lok Sabha that the Old Pension Scheme (OPS) will not be restored for central government employees. Responding to growing demands from unions and state governments, the minister emphasised that OPS creates an unsustainable fiscal burden and reintroduction is “simply not possible.”
Why OPS Was Scrapped
The Old Pension Scheme guaranteed lifelong pensions to government employees, typically 50% of the last drawn salary with dearness relief, fully funded by taxpayers. While this gave employees certainty, the ever-rising costs made it fiscally challenging. With more employees retiring and living longer, pension bills ballooned, leaving less room for spending on welfare, infrastructure, and development.
In 2004, the government introduced the National Pension System (NPS) as a replacement. Unlike OPS, NPS is a defined-contribution scheme where both employees and the government contribute to an individual retirement fund. Returns depend on market performance, reducing the strain on public finances but creating uncertainty for employees.
Unified Pension Scheme (UPS): The Middle Path
Acknowledging concerns about NPS, the Centre launched the Unified Pension Scheme (UPS) in January 2025 as a compromise between OPS and NPS.
Key features of UPS include:
- Employee contribution: 10% of basic salary.
- Government contribution: 18.5% of basic salary.
- Assured pension: After 25 years of service, retirees receive 50% of the average basic pay of the last 12 months.
- Proportionate pension for shorter service periods.
- Additional cover under CCS (Pension) Rules, 2021 and CCS (Extraordinary Pension) Rules, 2023 in cases of death or disability.
Despite this balance, employee response has been underwhelming. Out of nearly 23 lakh eligible central employees, only 30,989 (1.35%) have opted for UPS so far. To encourage participation, the government has extended the deadline until September 30, 2025.
No Refund of NPS Funds to States
Several states Rajasthan, Punjab, Chhattisgarh, Jharkhand, and Himachal Pradesh have announced their decision to return to OPS. However, Minister of State for Finance Pankaj Chaudhary clarified that the PFRDA Act, 2013, does not allow accumulated NPS contributions to be refunded. This means that even if states revert to OPS, funds already invested in NPS will remain with the pension regulator, creating additional financial challenges for those states.
Why Employees Demand OPS
Employee associations argue that OPS guarantees social security, while NPS leaves pensions at the mercy of volatile markets. Many fear that NPS may not provide enough income to meet post-retirement needs, especially given rising healthcare costs and inflation. Unions have staged nationwide protests, demanding either a full rollback to OPS or significant reforms to NPS.
The Larger Picture
The OPS vs NPS debate highlights the classic conflict between fiscal discipline and social security.
- OPS ensures certainty for employees but risks overwhelming government finances.
- NPS is fiscally sustainable but unpopular due to uncertainty in returns.
- UPS tries to strike a middle ground but is struggling to gain trust.
Economists caution that reviving OPS could severely weaken state and central finances in the long term. At the same time, the political pressure to secure employee votes especially with general elections in 2029 on the horizon means the pension debate is unlikely to disappear.
For now, the government’s position is clear: OPS will not be restored. The future will depend on whether the Unified Pension Scheme can convince employees that it provides both security and stability. Unless trust in UPS grows, pension reform will continue to be a flashpoint issue in India’s politics, shaping both fiscal policy and electoral strategy. The government has drawn a red line on OPS but the larger battle over pensions is far from over.
