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The Union Cabinet today approved the proposal to introduce a legislation to provide a regulatory framework for the New Pension System.
The establishment of the statutory Pension Fund Regulatory and Development Authority is to promote old age income security by establishing, regulating and developing pension funds under the New Pension system, to protect the interests of subscribers to pension schemes and for related matters.
Main Features of the New Pension System
The new pension system is based on defined contributions, which 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.
The system is mandatory for new recruits to the Central Government service except the armed forces and the monthly contribution is 10 per cent of the salary and DA to be paid by the employee and matched by the Central Government. However, there will be no contribution from the Government in respect of individuals who are not Government employees. The contributions and investment returns would be deposited in a non-withdrawable pension tier-I account. The existing provisions of defined benefit pension and GPF is not available to the new recruits in the Central Government service.
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 This option is given as GPF has been withdrawn for new recruits in Central Government service.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 of all of the ‘second tier’ of his money anytime. This withdrawable account does not constitute pension investment, and would attract no special tax treatment.
Individuals can normally exit at or after age 60 years for tier-I of the pension system. At the 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 of 60. However, in this case, the mandatory annuitisation would be 80% of the pension wealth.
The new DC based NPS will not entail any guarantee of returns by the Government. However, the same can be provided through market instruments.
Architecture of the New Pension System
It will have a Central Record keeping and Accounting (CRA) infrastructure, several pension funds (PFs) to offer three categories of schemes viz, option A, B and C.
The participating entities (PFs 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.
Any switching between the scheme/pension funds at the option of a subscriber, would be effected by the central record keeping agency.
Regulatory Authority
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.
Investment Strategy
There will be different investment choices such as option A, B and C. Option A would imply predominant investment in fixed income instruments and some investment in equity. Option B will imply greater investment in equity. Option C will imply almost equal investment in fixed income and equity.
Option A
Option B
Option C
Government paper
At least 60%
At least 40%
At least 25%
Corporate Bonds
(investment grade)
Upto 30%
Upto 40%
Upto 25%
Equity
Upto 10%
Upto 20%
Upto 50%
Pension funds would be free to make investment in international markets subject to regulatory restrictions and oversight in this regard.
It is proposed to evaluate market mechanisms (without any contingent liability) through which certain investment protection guarantees can be offered for the different schemes.
Tax treatment
Pension contributions and accumulation would be accorded tax preference upto a certain limit, but benefits would be taxed as normal income.
Scope of the New Pension System
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.
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 programmes could voluntarily choose to additionally participate in this scheme.
The new system will also be available, on a voluntary basis, to all persons including self-employed professionals and others in the unorganised sector.
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