International Conference On Innovative Management Strategies for Emerging Business Paradigms

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New Pension Scheme in India Mrs. G. Bhuvanaswari (Asst. Professor) Miss. A. Elakkiyavathi (Research Scholar) St. Josephs College of Arts and Science (Autonomous) Cuddalore-1 D/O N. Anbarasan 7/6 welling ton street Cuddalore-O.T

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: A. Elakkiyavathi

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: elakkiya12.anbu@gmail.com : F/IC/2012

New Pension Scheme in India

ABSTRACT India has nearly eighty million elderly people, which is one eighth of worlds elderly population. A vast majority of this population is not covered by any formal old age income scheme and is dependent on their earnings and transfer from their children or other family members. These informal systems of old age income support are imperfect and are becoming increasingly strained. Poverty and unemployment may have acted as deterrents to provide a tax financed state pension arrangement for each and every citizen attaining old age. Therefore, in the organised sector (excluding the Government servants) a pension policy has been adopted based on financing through employer and employee participation. This has, however, denied the vast majority of the workforce in the unorganized sector access to formal Channels of old age economic support Pension Policy in India has primarily and traditionally been based on financing through employer and employee participation. As a result, the coverage has been restricted to the organized sector and a vast majority of the workforce in the unorganized sector has been denied access to formal channels of old age financial support This paper reviews the current state of the Indian pension system and concludes with some policy directions for reforming the Indian pension system.

New Pension Scheme in India

Introduction India, like most other developing countries, does not have a universal social security system to protect the elderly against economic deprivation. Perhaps, persistently high rates of poverty and unemployment act as a deterrent to institute a pay-roll tax financed state pension arrangement for each and every citizen attaining old age. Instead, India has adopted a pension policy that largely hinges on financing through employer and employee participation. This has however restricted the coverage to the organized sector workers - denying the vast majority of the workforce in the unorganized sector access to formal channels of old age economic support. Notwithstanding the limited size and scope, India has a long tradition of pension and other forms of formal old age income support system. History of Indian Pension system The history of the Indian pension system dates back to the colonial period of British-India. The Royal Commission on Civil Establishments, in 1881, first awarded pension benefits to the government employees. The Government of India Acts of 1919 and 1935 made further provisions. These schemes were later consolidated and expanded to provide retirement benefits to the entire public sector working population. Post independence, several provident funds were set up to extend coverage among the private sector workers. Today, major retirement schemes in India include provident fund, gratuity and pension schemes. The first two schemes provide lump sum retirement benefit while the last one makes payment in the form of monthly annuity. These schemes are characterized by some common features i.e. they are mandatory, occupation based, earnings related, and have embedded insurance cover against disability and death

The central government, states and union territories provide pension benefits to the public employees. In addition, a large numbers of public and local bodies and autonomous institutions run their own pension schemes guaranteed by the government. The central government alone administers separate pension programs for civil employees, defense staff and workers in railways, post, and telecommunications departments. These benefit programs are typically run on a pay-as-you-go, defined-benefit basis. The schemes are non-contributory i.e. the workers do not contribute during their working lives. Instead, they forego the employers contribution into their provident fund account. The entire pension expenditure is charged in the annual revenue expenditure account of the government Employees Pension Scheme (EPS) The Employees Pension Scheme (EPS) is a defined benefit scheme, based on a contribution rate of 8.33% from the employee to which government makes an additional contribution of 1.16%. EPS was introduced in 1995, and is applicable to the workers who entered into employment after 1995. In case of death of a member the scheme provides for a pension to the spouse for his/her remaining life. There are other voluntary pension schemes available for general public but these schemes cover a very small segment of the total population. Life Insurance Companies and Mutual funds are offering these plans. These are essentially defined contribution schemes. Personal Pension Plans and Group Pension Products offered by the life insurers are being supervised by the Insurance Regulatory and Development Authority (IRDA). New Pension System (NPS) During the last seven years, from 2000 to 2007, a marked shift in pension policy in India was witnessed which culminated in introduction of a new pension system. A High level Expert Group (HLEG) and the Old Age Social and Income Security (OASIS) Project commissioned by the Government were the two initial milestones on the road to pension reforms for the Government employees and the unorganized sector respectively. These

efforts culminated in setting up of the Pension Fund Regulatory and Development Authority (October 2003), introduction of a New Pension System (December 2003), and introduction of the PFRDA Bill in Parliament (March 2005). HLEG suggested a new hybrid scheme that combines contributions from employees and the Union Government on matching basis, on the one hand, while committing to the employees a defined benefit as pension. The objective of the Government was to design a scheme for new entrants in Central Government service where the contribution is defined, where no extra infrastructure is sought to be created in Government and which is capable of serving other groups like State Government employees, middle class selfemployed people and even those in the lower income bracket amongst the unorganized sector subsequently. OASIS report recommended a scheme based on Individual Retirement Accounts to be opened anywhere in India. It was envisaged that Banks, Post Offices etc., could serve as Points of Presence (POPs) where the accounts could be opened or contributions deposited. There will be a depository for centralized record keeping, fund managers to manage the funds and annuity providers to provide the benefit after the age of 60. The New Pension System (NPS) which has its origin in the two reports mentioned above, was made operational through a notification dated 22nd December, 2003. It has been made mandatory for new recruits in the Central Government (except Armed Forces) from 1st January 2004. It marks a shift from the defined benefit to a defined contribution regime. It is based on the principles of defining upfront the liability of Government, giving choice to subscribers, facilitating portability of labour force and ensuring transparency and fair-play in the industry. The Central Government employees (excluding employees of autonomous organizations) are already covered under the new pension system and contribute 10 percent of their salary and dearness allowance towards pension with a matching contribution from the government. NPS will also be available to all individuals in the unorganized sector on a voluntary basis

New Pension System 2009 Its a pension system recently launched by Govt of India from 1st April, 2009. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime. It will work almost the same way as Private Pension Schemes. Until now the pension schemes was available to Govt employees and employees of Big companies who has Provident fund facility. Any other person had to go with Private Pension schemes provided by Insurance Companies. IT as not a govt scheme for common person, With NPS now its a common person gateway to Pension Schemes While the introduction of the New Pension System for new recruits of the Central Government/ State Governments is a positive step in the direction of reforming the pension sector in India, the road ahead has many challenges. Features - No upper limit of Investment - Minimum limit of 6,000 per year (Rs. 500 per month). - Annual Fees of .00009% (90 paisa for Rs 10,000) for Manging the fund. - Tax benefit under sec 80C. - Any Indian citizen between 18 and 55 years can invest in NPS. Control And regulation PFRDA (Pension Fund Regulatory and Development Authority) will monitor and regulate all the activities under NPS. It checks how your money in invested and makes sure that the fund managers are following the rules and guidelines. Its just like SEBI for Stock Market There will be 6 Fund houses appointed by Government to manage the funds under NPS. They are: 1. SBI Pension Funds Private Limited. 2. UTI Retirement Solutions Limited. 3. ICICI Prudential Pension Funds Management Company Limited.

4. Religare Pension Fund Limited. 5. IDFC Pension Funds Management Company Limited. 6. Kotak Mahindra Pension Fund Limited. They will take all the decisions of where the money received under NPS should be invested in the best possible way considering all the rules and regulations set by PFRDA. Point of Presence Entities The following entities have been approved by PFRDA for appointment as Points of Presence (POPs) under the New Pension System for all citizens other than Government employees covered under NPS. Allahabad Bank, Axis Bank Ltd ,Bajaj Allianz General Insurance Co Ltd, Central Bank of India, Citibank N.A, Computer Age Management Services Private Limited ICICI Bank Ltd, IDBI Bank Ltd, IL&FS Securities Services Ltd, Kotak Mahindra Bank Limited, LIC of India, Oriental Bank of Commerce, Reliance Capital Ltd, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of India, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, The South Indian Bank Ltd, Union Bank of India and UTI Asset Management Company Ltd .Investment Options and Structure Structure wise they are very similar to ULIPs or ULPPs from Investment Point of View We have different kind of funds options with different exposure to Equity Instruments Corporate Debt Fixed Income Instruments Govt Securities. Different Options Risky option: The higher allocation in this option will be in Equity.

To decrease the risk, Equity Investment is allowed only to invest in Index funds which track Sensex or Nifty. Also the equity exposure is caped at 50% 7

Moderate: IN this options Main exposure would be corporate debt and fixed income securities with some exposure in Equity and Govt securities. It will be moderately risky and rewarding. Safe: In this option mainly the investment will be done in Govt securities, and very little will be invested in Equity. There will be a Default option, under which the allocation will be decided as per our age, where Equity Allocation will be high in the start and then it will come down as our age increases. We can also decide our own asset allocation as per our Risk appetite Cost There are different kinds of Costs in NPS. - Fund management charges of .0009% per Annam, which is excellent if compared to ULPPs or Mutual funds charges. - Annual Maintenance charges of Rs 350 and Rs 10 per transaction to CRA (soon, it will be Rs 280 per year, Rs 6 for per transaction). - Rs 40 for registration with PoP and Rs 20 per transaction with them. - There are other small costs too, lets leave it for now. Taxation Issue As per the current law, the amount received at the end from NPS would be taxable PFRDA is trying hard with govt to exempt the tax. We will get the 80C benefits on the amount invested in NPS. Closure of account Under following circumstances our account may be closed before attaining retirement age - Death - account value reduces to zero - change in citizenship status. Challenges of New Pension System A major challenge of the New Pension System is to provide the individual subscriber with an adequate retirement income. Public sector pension schemes involve policy risk in as much as the Government of the day may not be able to accommodate require pension outlays leading to delays in pension payments or defaults in some cases.

On the other hand, private pension schemes are less subject to this policy risk because Governments are less prone to confiscate private property. However, DC funds do involve market risk during the accumulations phase when contributions and returns on investment build up in the fund. The risk is that the pension funds performance may be insufficient to give reasonable retirement income to the pension subscribers. Conclusion Its a good initiative from Govt to introduce a Pension Scheme which will give common people a chance to invest in Pension schemes which is from Govt. One important thing to understand and note is that Even though its a pension scheme, the returns are not guaranteed. It can vary drastically depending on our asset allocation and how you choose the fund options. Other point is that the amount received at the end would be taxable which can have adverse affect on the return potential. But I suggest soon govt will make the final amount received non-taxable.