Central government employees face a decision that could define their retirement outcomes.
Should they remain in the National Pension System (NPS) or opt for the Unified Pension Scheme (UPS)? Our detailed study offers a clear answer.
Under realistic assumptions, UPS is a much better deal for subscribers because replicating UPS-type guaranteed pensions through NPS is very difficult.
NPS is a market-linked pension system in which the subscriber and the employer contribute a fixed share of salary into an individual account, and the retirement pension depends on how those investments perform.
UPS promises a more predictable outcome: an assured, inflation-indexed pension linked to salary. Under NPS, benefits depend on market returns; under UPS, the benefits are pre-defined.
Cash-flow test
Comparisons between pension systems often get lost in technical details. To make the comparison intuitive, we applied a simple test.
Think of UPS as a set of promised retirement cashflows—an assured pension equal to 50% of the average basic pay of the last 12 months, indexed to inflation for life.
We then asked whether an NPS corpus can fund those same cashflows.
We modelled a representative government employee whose contributions compound in a market-linked NPS portfolio. At retirement, the NPS corpus is used to pay the UPS-equivalent pension each year until the age of 90. If the corpus runs out before age 90, the simulation is counted as a failure.
Withdrawal challenge
The first-year withdrawal rate required under NPS to fund UPS-equivalent benefits is about 6.7%.
In other words, the UPS pension promise behaves like a withdrawal plan that begins around 6–7% and is indexed to inflation for decades. That is a demanding liability.
Retirement planning literature—including our earlier work in the Indian context—suggests that withdrawal rates above 3.5% are difficult to sustain over long horizons. A 6–7% withdrawal burden represents a very different regime.
This is why, in our simulations, the NPS corpus runs out before age 90 in 82% of cases.
This does not mean NPS doesn’t work. It simply means that if a market-linked portfolio is asked to deliver a high, assured, inflation-indexed UPS-type pension for 30 years, it will often fall short.
Equity gamble?
One possible argument is that NPS subscribers can maintain a higher equity allocation—up to 75% during decumulation—which might help close the gap with UPS.
We tested this scenario as well by assuming that the subscriber defers annuity purchase and maintains a high equity allocation.
The results are not encouraging.
Higher equity allocations do improve outcomes somewhat, but failure rates remain high across permitted asset allocation options.
The best outcome occurs for subscribers who choose the Balanced Life Cycle allocation during the accumulation phase and maintain a 75% equity allocation during decumulation. Even in this case, however, the failure rate exceeds 35%.
Higher equity improves the median outcome, but it also increases tail risk—the “bad luck” scenarios become much worse.
In effect, maintaining a high equity allocation in NPS to try to beat UPS starts to resemble a gambling strategy.
Different designs
This is not a verdict that NPS is a “bad” product.
NPS and UPS are designed to deliver fundamentally different retirement outcomes.
NPS is a defined contribution system whose strength lies in flexibility and individual ownership. Under NPS, the subscriber can withdraw up to 60% of the accumulated corpus (for central government employees) at the time of retirement.
UPS, by contrast, is designed around income certainty.
Our exercise is simply a cash-flow equivalence test. It shows that if the goal is to replicate UPS’ guaranteed, inflation-linked pension, a market-linked NPS corpus will struggle to deliver the same outcome.
For an individual government employee who is eligible and choosing primarily on the basis of retirement income security, our analysis suggests UPS is likely to be the more valuable option in most realistic scenarios.
It offers what retirees value most: predictability, longevity protection, and insulation from market risk.
Pushpinder Singh and Ravi Saraogi, CFA.
(Pushpinder is from the Policy Research Department at PFRDA. Ravi is co-founder at Samasthiti Advisors. Views are strictly personal)