NPS
From Indiapensions
A new pension system for India, and the establishment of a new dedicated pension sector regulator was proposed during the Union Budget, 2003-04 and was approved by the Union Cabinet on 23rd August 2003. The new pension system came into effect from 01 January 2004. Participation in this new pension system is mandatory for Central Government employees (excluding Armed Forces in the first stage) who join service on or after 01 January 2004.This system will replace the existing PAYGO DB pension scheme and the DC General Provident Fund (GPF) for these new employees. After a few months, this new pension system will be opened to all other citizens of India including employees of State Governments and other public and private employers as well as self-employed professionals, informal sector workers, NRIs, etc.
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Legislation
The Finance Minister of India announced the decision of developing suitable legislation for forming the PFRDA in his 2004 Budget speech. The Central Government recently cleared the Pension Fund Regulatory and Development Authority Ordinance, 2004. This Ordinance paves the way for the establishment of an Authority to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.
Working of the NPS
Each individual who joins this new pension system will be allotted a unique personal retirement account (PRA) number. This pension system will offer two types of sub- accounts created by individual members:
- a Tier-I non-withdrawable and tax deferred pension account
- a Tier-II withdrawable savings account with no tax advantages (and subject to certain minimum contributions per year into the Tier-I account)
The Tier-I account will be EET where a member's contributions will be exempted from tax at entry, exempted from tax while they stay invested and earn returns, and only taxed (at a rate decided by the GOI) at the time of withdrawal at retirement. Contributions to the Tier-II account may be permitted only after achieving some minimum annual accretion (to be specified by the PFRDA) into Tier-I account. Withdrawals from the Tier-I account will be permitted only at retirement. A part of the terminal accumulations in Tier-I account will be annuitized on a mandatory basis.
In this system, a member will accrete savings towards his retirement into his PRA through his working life. This PRA will stay with the member regardless of where he stays or works including spells of unemployment, self-employment, changes in jobs or location. He will be able to use a nation-wide network of competing pension service providers (POPs) to access this system or for opening a PRA, accreting new contributions, receiving account or system information and for obtaining retirement benefits.
A member will have complete control on how his contributions to his PRA are managed. He will be able to select a professional Pension Fund Manager (PFM) from a pool of competing pension fund managers registered with the PFRDA. Each PFM in this system will offer a choice of three simple and standard pension schemes with different risk and return profiles. If a member is unable to select a PFM, his savings will be directed to a 'Default' scheme. If he desires, the member will be able to allocate his savings across multiple PFMs and schemes. He will also be able to seamlessly switch his savings between fund managers and products. Each member will receive periodic, consolidated statements of his PRA which will reflect his notional wealth in his PRA across various products and PFMs.This will be the sum total of his contributions at that point in time and the returns that these contributions have earned.
On retirement, the member will be able to use a part of the savings accumulated over the years in his Tier-I PRA to buy an annuity which will provide him and his spouse a pension for the rest of their lives.
Policy framework
While its broad policy framework is already in place, the Department of Economic Affairs is considering several important questions and policy choices as this new pension system is translated from ideas to implementation. These questions relate to the quality of service providers (pension fund managers, recordkeeping agency,distributors,etc.), their functional roles and obligations to members, as well as policies and strategies for obtaining wider coverage and maximising retirement benefits.Over the last few months,the DEA has circulated several draft policy proposals related to the CRA, PFMs, POPs and other aspects of the NPS for public comments and inputs. These can be accessed at http://www.iief.com
Regulation
The Government recently passed an ordinance for the creation of a pensions regulator called the Pension Fund Regulatory and Development Authority. The PFRDA will provide members with a sound regulatory ramework for maximizing their retirement benefits and an umbrella of safety with respect to prevention of fraud and malpractice.
While the institutional capacity is being put in place, the 20% monthly contribution by each new employee who has joined service after 01 January 2004, is being individually recorded and credited into the Public Account under an Interim arrangement managed by the Controller General of Accounts (CGA) and the Central Pension Accounting Office (CPAO). These contributions receive a rate of interest decided by the Government during this interim phase. As of 2004, this is 8%. Once the institutional capacity is in place,this pool of savings and the interest accrued on them will be credited into the personal retirement account of each employee.
