Legal & Regulatory Framework in

Pensions Sector

Invest India Economic Foundation
New Delhi, May 20, 2004

Hemant Sahai Associates
Advocates
New Delhi Mumbai Bangalore Goa
Hemant Sahai Associates
Advocates
Legal & Regulatory Framework in
Pensions Sector
Legal Regime governing the Pensions Sector:
Pensions Act, 1871 (23 of 1871),
Employees Provident Funds and Miscellaneous Provisions
Act, 1952
The Employees Provident Funds Scheme, 1952
The Employees Deposit-linked Insurance Scheme, 1976
The Employees Pension Scheme,1995
The Payment of Gratuity Act, 1972
Government Related :
The terms and conditions of service of Government Servants,
Government Pension Rules, 1972 ,
Government GPF Rules 1960,
Insurance Act, 1938 (Annuities on Life)

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Advocates
Pensions Act, 1871

Scope of the Pensions Act
To consolidate and amend laws relating to pensions
and grants by government of money or land revenue
Put structure in place that distribution of pension
should essentially be in hands of executive government
without intervention of civil courts
Jurisdiction of civil courts ousted except to limited
extent upon receipt of certificate from Collector
Provides for commutation of pensions
Pensions exempt from attachment
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Advocates

Employees Provident Funds and
Miscellaneous Provisions Act, 1952

APPLICABILITY OF ACT
To Any Establishment which is a factory engaged in any industry
specified in Schedule I and employing 20 or more persons.
Any other establishment or class of establishment employing 20
or more persons, as may be notified by the Central Government.
SCHEMES
Employees Provident Funds Scheme,1952 sec 5
Employees Pension Scheme,1995 sec 6A
Employees Deposit-Linked Insurance Scheme,1976 sec 6C
REGULATORY MECHANISM
Central Board - section 5A
Executive Committee section 5AA
State Board - section 5B
Central Government
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Advocates
The Schemes-EPF Act- contd..
Employees Provident Fund Scheme,1952
Fund Created under Sec 5 and vested in and
administered by the Board created under sec 5A
Contributions to the Fund Clause 29 :
By Employer - 10% of basic, DA and Retention Allowance
12% in respect of establishments/class specified by CG
Matching contribution by employee
Scheme Applicable to :
All factories and other establishments to which Act applies or is
applied does not apply to Tea Factories in Assam
All employees drawing pay upto Rs 6,500 per month


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Advocates
The Schemes-EPF Act- contd..
Employees Provident Fund Scheme,1952
Corpus of the Fund under the Scheme to be
deposited with RBI, SBI or any other approved
scheduled bank clause 48, 52
Corpus to be invested as per direction of CG, in
securities referred to in Section 20 of Indian
Trusts Act clause 52
Fund cannot be expended for any purpose other
than to credit of individual members


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Advocates
The Schemes-EPF Act- contd..
Employees Pension Scheme,1995
Pension Fund Created under Sec 6A and vested in and
administered by the Board created under sec 5A
Contributions to the Pension Fund Clause 3:
By Employee 8.33% of basic, DA and Retention Allowance
This is a part of the contribution made to the Fund under the EPF
Scheme
By CG 1.16% o the pay
Scheme Applicable to :
All employees of factories and other establishments to which Act
applies or is applied in terms thereof


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Advocates
The Schemes- EPF Act
Employees Pension Scheme,1995
Scheme to provide for :
Replaces Family Pension Scheme which merges with this
scheme
Superannuation pension, retiring pension, disablement
Widow/widower, children or orphan pension
Corpus of the Pension Fund, except the CG
contribution shall be invested as per directions of
CG in securities referred to in Section 20 of Indian
Trusts Act clause 26



Hemant Sahai Associates
Advocates
The Schemes- EPF Act
Employees Pension Scheme,1995
Pension Fund cannot be expended for any
purpose other than payments envisaged in the
scheme, i.e. payment of family pension, life
assurance benefit and retirement cum withdrawal
benefits clause 27


Hemant Sahai Associates
Advocates
The Schemes-EPF Act- contd..
Employees Deposit Linked Insurance Scheme,1976.
Deposit Linked Insurance Fund Created under Sec 6C
and vested in and administered by the Board created
under sec 5A
Contributions to the Insurance Fund :
By Employer 1% of aggregate of basic, DA and Retention
Allowance - Sec 6C(2)
Upto 0.25% to meet expenses etc. - Sec 6C(4)(a)
Scheme Applicable to :
All employees of establishments to which the Act applies


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Advocates
The Schemes EPF Act- contd..
Employees Deposit Linked Insurance Scheme,1976.
To provide life insurance benefits
Investment of funds in the Insurance Fund :
Funds contributed into the Insurance Fund upto 31.3.1997 to be
deposited with CG and shall fetch statutory interest @8.5% per
annum.
From 1.4.1997- Corpus of the Fund under the scheme to be
deposited with RBI,SBI or any other approved scheduled bank
and invested as per direction of CG in securities referred to in
Section 20 of Indian Trusts Act
Insurance Fund cannot be expended for any purpose
other than payment of benefits under the scheme clause
17(1)


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Advocates
Regulatory Mechanism EPF ACT
Central Board
Constituted by notification by CG sec 5A
Trustees appointed for a period of 5 years
To administer the Funds in respect of the Schemes provided
by the Act and to effectuate the provisions of the scheme
Appoint Central Provident Fund Commissioner to act as the
CEO of the Board

Composition
Chairman & Vice Chairman
Not more than 5 persons from the CG officials
Not more than 15 persons representing state government
10 persons representing the employers of the
establishments to which the respective schemes apply
10 persons among employees







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Regulatory Mechanism EPF ACT

The Central Board to act through its functionaries such as the
the Executive Committee, Central Provident Fund
Commissioner (CEO of the Board), Regional Commissioner.

Powers of Central Government
Till the time the Board is constituted the CG shall administer he
Fund and may exercise any of the powers and discharge the
functions of the Board
Power to give directions
Power to make rules
Power to remove difficulties


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Advocates
Adjudications EPF ACT

Appeal to Tribunal
Any person aggrieved by a notification of the CG or by any
order of the CG or any authority (Commissioner) under the Act,
can prefer an appeal to a Tribunal
Penalties & Prosecution
Under the Provident Funds Scheme & the deposit linked insurance
scheme any person who avoids making any payment shall be punished
with an imprisonment for a term that may extend to one year and a fine
of Rs. 4000.

Under the Employees Pension Scheme any person who is guilty of
contravention of or non-compliance of any provision/requirement of the
scheme shall be punishable with imprisonment that may extend to one
year and with fine that may extend to Rs. 5000/


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The Payment of Gratuity Act, 1972
Object: Provides for a scheme for the payment of gratuity
to employees engaged in factories, mines, oilfields,
plantations, ports, railway companies, shops or other
establishments.
Authority: Different controlling authorities to be
appointed by appropriate government for different states for
the administration of this act.
Gratuity Fund: Employer to maintain a gratuity fund or
shall obtain a insurance from the Life Insurance Corporation
of India for his liability for payment towards the gratuity
under this Act.
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The Payment of Gratuity Act, 1972
Payment:
Gratuity payable to employee on termination of his employment
after rendering continuous service for at least five years.
Gratuity payable on employees superannuation, retirement or
resignation, death or disablement due to accident or disease.
Penalty: Any employer who contravenes or makes default
in complying with any of the provisions of this act shall be
punishable with imprisonment for a term not less than three
months and can extend to one year, or with a fine not less
than Rs 10,000 extending upto Rs 20,000 or both.


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Advocates
Government Pension Rules,
1972
The Government employees receive a non-
contributory, indexed, defined benefit pension,
funded entirely by the State.

The Government employees contribute 6% of
wages into a provident fund scheme, maintained
by the appropriate government.

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Insurance Act, 1938
Definition of Life Insurance Business
Sec 2(11) : life insurance business means the business of effecting
contracts off insurance upon human life, including any contract whereby
the payment of money is assured on death (except death by accident
only) or the happening o any contingency dependent on human life, and
any contract which is subject to payment of premiums for a term
dependent on human life and shall be deemed to include-
The granting of disability and double or triple indemnity accident
benefits, if so provided in the contract of insurance;
The granting of annuities upon human life; and
The granting of superannuation allowances and annuities payable out
of any fund applicable solely to the relief and maintenance of persons
engaged or who have been engaged in any particular profession, trade
or employment or of the dependents of such persons.

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Advocates
Public Provident Fund Act, 1968:
Provides for Public Provident Fund Scheme that establishes a
provident fund for the general public to make contributions to the
fund and obtain income tax rebate.
Minimum investment Rs 500 maximum 70,000 per annum.
Withdrawals- Only one withdrawal allowed during any one year
from sixth year. Withdrawal limited to 50% of the balance at the
credit at the end of 4th year preceding the year in which the amount
is withdrawn or the end of the preceding year whichever is lower.
The account extended beyond 15 years; partial withdrawal allowed
up to 60% of the balance to the credit at the commencement of the
extended period.

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Advocates
New Pension Scheme
The New Scheme has been implemented effective from January 1, 2004
i.e. the New Scheme shall apply to specified new government servants
commissioned into Government service after this date
Contours of this New Scheme as notified by CG :
based on defined contributions,
will use the existing network of bank branches and post offices etc. to
collect contributions and interact with participants allowing transfer of the
benefits in case of change of employment and offer a basket of pension
choices,
mandatory for new recruits to the central Government service except the
armed forces. The existing provisions of defined benefit pension and GPF
would not be available to the new recruits in the central Government
service.
monthly contribution would be 10 percent of the salary and DA to be paid
by the employee and matched by the Central Government.
Hemant Sahai Associates
Advocates
New Pension Scheme
no contribution from the Government in respect of individuals who
are not Government employees.
contributions and investment returns to be deposited in a non-
withdrawable pension tier-I account.
In addition to the above pension account, each individual may also
have a voluntary tier-II withdrawable account at his option.
This option is given as GPF is proposed to be withdrawn for new
recruits in Central Government service. Government will make no
contribution into this account. These assets would be managed
through exactly the above procedures. However, he would be free to
withdraw part or all of the second tier of his money anytime. This
withdrawable account does not constitute pension investment, and
would attract no special tax treatment.
Hemant Sahai Associates
Advocates
New Pension Scheme
Individuals can normally exit at or after age 60 years for tier I of the
pension system. At exit the individual would be mandatorily required to
invest 40 percent of pension wealth to purchase an annuity (from an IRDA-
regulated life insurance company).
In case of Government employees the annuity should provide for pension
for the lifetime of the employee and his dependent parents and his spouse at
the time of retirement. The individual would receive a lump-sum of the
remaining pension wealth, which he would be free to utilise in any manner.
Individuals would have the flexibility to leave the pension system prior to
age 60. However, in this case, the mandatory annuitisation would be 80% of
the pension wealth.
a central record keeping and accounting (CRA) infrastructure, several
pension fund managers (PFMs) to offer three categories of schemes viz.
option A, B and C.
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Advocates
New Pension Scheme
The participating entities (PFMs and CRA) would give out easily
understood information about past performance, so that the individual would
be able to make informed choices about which scheme to choose.
An independent pension fund regulatory and development authority
(PFRDA) will regulate and develop the pension market. PFRDA will
develop its own funding stream based on user charges.
Till such time when a statutory PFRDA is established, an interim PFRDA,
on the pattern of SEBI and IRDA, should be appointed by an executive
order.
Pension contributions and accumulation would be accorded tax preference
upto a certain limit, but benefits would be taxed as normal income
The option of joining the new system would also be available to the State
Governments and as and when they decide, the new system would be
capable of accommodating the new participants.


Hemant Sahai Associates
Advocates
New Pension Scheme
Mandatory programmes under the Employee Provident Fund
Organisation (EPFO) and other special provident funds
would continue to operate as per the existing system.
However, individuals under these programs could
voluntarily choose to additionally participate in this scheme.


Hemant Sahai Associates
Advocates
Pension Sector Way Forward
Enact THE PENSIONS (REGULATION AND
DEVELOPMENT) ACT
This is not merely a Pensions Fund Regulator but a
regulator for the entire pensions sector in India
Clear distinction between policy and implementation
Policy is exclusive prerogative of CG and Regulation
and implementation is exclusive prerogative of
regulator
Regulator will issue licenses for PFMs, CRA and such other
intermediaries as may be deemed necessary
Regulator to have penal powers
Regulated Assets

Hemant Sahai Associates
Advocates