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A key objective for the Government of India from this pension reform is to achieve broadly based social protection arrangements to reduce vulnerability in old age for the 86% of workers located in the unorganised sector. Concomitantly, the arrangements should reduce potential future budgetary pressures by increasing self-provision, contribute to economic growth by increasing aggregate long-term savings to provide greater depth and liquidity in Indian financial markets and facilitate labour mobility through fully vested portable pension accounts. The degree to which these objectives will be achieved will depend on the level of voluntary participation in the pension arrangements that is achieved. In this direction, the PFRDA will be expected to play a very critical role in increasing voluntary coverage by facilitating national-wide access to this pension system and delivery of public information and education campaigns.
Launch of the NPS
In late 2003, the central government began the process of implementing pension reforms by replacing the Central Civil Services (Pension) Rules 1972, the GPF (Central Service) Rules 1960, and Gratuity Rules applicable to central government (civil) employees with the new NPS Rules. The NPS Rules came into effect from 01 January 2004 and apply on a mandatory basis to all employees joining service from this date in central (civil) ministries, non-civil departments, autonomous bodies, grant-in-aid institutions, Union Territories and all other organisations whose employees derive a pension from the Consolidated Fund of India.
Employees of the Indian Armed Forces and central (civil and non-civil) employees recruited prior to 01 January 2004 are specifically excluded from the NPS. Each new (eligible) employee of the central government is mandated to contribute 10% of his/her basic salary plus DA plus DP on a monthly basis towards his/her pension. The relevant parent ministry or department or organisation matches this contribution and transfers the full 20% of wages (basic+dearness allowance+dearness pay) to the individual pension account of each eligible employee on a monthly basis. These pension contributions are being presently parked in the public account under a separate accounting head and earn the GPF interest of 8% per annum. The Ministry of Finance estimates that since 2003-04 uptil 10th March 2006 81,128 central government employees have joined the scheme.
Data about contributions received under the NPS by various government agencies has by far been sporadic. It can be expected that when the PFRDA Bill 2005 passes in the parliament, the flow of information from various official channels would stabilise. The Ministry of Finance estimates the pension corpus of central governement employees under the NPS till December 2005 to be approximately Rs. 215 crore. The contribution of Civil Ministries/ Departments In this amount equals around Rs. 154 crore forming around 71% of the total corpus. The Ministry of Railways contributes another 25% or Rs. 53 crore to the total. The share of Department fo Posts and the Department of Telecommunications forms a small part of the corpus.
Institutional Framework for NPS
The NPS is based on personal retirement accounts created by individual members. In this system, a member will accrete savings into his PRA while he is working and use the accumulations at retirement to procure a pension for the rest of his life. Members in this system will enjoy a variety of important benefits including portability across jobs and locations, rights and choices regarding fund managers and schemes, freedom to switch between service providers, low transactions costs, nationwide access, and protection against fraud and malpractice through the PFRDA as the dedicated regulator.
The Central Recordkeeping Agency (CRA)
Implementation of these features necessitates centralized recordkeeping and administration. The CRA will enable reconciliation and administrative efficacy as well as economies of scale. The CRA will be required to electronically interconnect with the PFRDA, service providers (banks, post offices, depository participants, etc.), pension fund managers and life insurance firms (annuity providers). It will also offer a number of services directly to members including consolidated account statements. This centralized recordkeeping and administration facility will need to be flexible to future changes in technology and system specifications including number of members, number of fund managers and schemes, service and functional obligations, etc. The choice of the agency which is entrusted with the task of central recordkeeping is of paramount importance and interest to PFRDA and the GOI. The full operational and member service framework, as well as the core principles of this pension system rest on the ability of the CRA to efficiently and accurately discharge its responsibilities and enforce the service and functional obligations on service providers over multiple decades.
The PFRDA will invite a suitable agency to serve as the CRA for this new pension system. In this regard, the PFRDA will publish a set of eligibility and pre-qualification criteria on the basis of which interested and eligible entities will be able to submit a proposal to serve as the CRA. This process of appointment and establishment of the CRA should be undertaken on a priority basis to contain the backlog of central and state government employees joining the NPS and to migrate existing records to the CRA at the earliest.
Pension Fund Managers (PFMs)
Pension benefits in the NPS will depend primarily on contributions and the accumulated investment earnings on them. Efficient management of retirement savings will generate larger benefits for members. Returns from investment of retirement savings will be an important tool for motivating new members to enter the NPS and for existing members to continue their contributions. On the other hand, poor returns, inability of pension asset managers to honor their commitments, institutional failures and regulatory lapses will have an equally significant impact on lowering public confidence in the system, and consequently on the entry and continued participation by members.
Therefore, the primary concern of the PFRDA and the GOI will be to provide an environment for members to maximize their retirement benefits in a fraud-free environment. As a result, stringent entry and selection criteria for pension asset managers with adequate experience and capabilities, standardized and regular information disclosure, effective supervision of investment processes and strict adherence to prescribed investment and business rules will be of paramount interest to PFRDA and GOI. The PFRDA will appoint competing professional pension fund managers (PFMs) for this system. The PFRDA will need to address several policy choices and questions which will have an important bearing on the incentives, performance and actions of pension fund managers and hence on member benefits.
NPS Service Delivery Network (POPs)
The success of the NPS in providing broad-based access to retirement savings will depend on a nationwide service delivery infrastructure. In order to lower the costs of access and service delivery under NPS for the public, the existing network of non-proprietary, third-party distributors including banks, postal branches and DPs may be harnessed into the NPS to serve as points of presence (POPs). The PFRDA and GOI will need to evaluate a variety of policy options in licensing POPs. For central and state government employees, DDOs and P&AOs will perhaps continue to offer limited services including account opening, issuance of UIDs and deductions and transfer of monthly contributions and PFM and scheme preferences to the CRA
Authorised Retirement Advisors ( ARAs )
In this DC system, the choices made by individual members regarding schemes and PFMs will determine the retirement benefits that they derive. If individuals make inefficient choices, they will face inadequate or sub-optimal retirement outcomes from the NPS. Authorised Retirement Advisors ( ARAs ) will provide a vital link between the NPS architecture and members. ARAs will be expected to provide retirement planning advice to individuals, assist them in selection of appropriate products and PFMs and in changing their allocation over time. Miss-selling and poor advice at the front-end will have a severe negative impact on consumer confidence in the NPS. The PFRDA and GOI will need to establish stringent qualification standards for licensing of ARAs.
Protection of Subscribers' Interest
In this process, a sound regulatory framework (through PFRDA) will provide individuals an umbrella of safety with respect to problems of risk management and prevention of fraud over multiple decades. The PFRDA will regulate charges, entry and exit, quality of service by POPs, ARAs , CRA and PFMs during the accumulation phase of this pension system. The PFRDA will need to establish sound regulations, governance standards and appropriate penalties for malpractice. PFRDA will also need to establish suitable IT, HR and process capacity to be able to regulate the pension sector over multiple decades and monitor membership coverage and member behavior. It will need to undertake extensive public education, awareness and communication campaigns and establish efficient and effective grievance filing and redressal mechanisms to boost member confidence.
Administrative Arrangement for Civil Service Members
Introduction of the NPS for the central government has necessitated the establishment of a modified internal administrative and payroll process in the central ministries and relevant departments. Under this new administrative arrangement, the various payroll arms of the central government (CGA for central civil ministries, and the respective DDOs and P&AOs of non-civil departments, autonomous bodies, grant-in-aid institutions, Union Territories , etc.) are responsible for: • issuing a unique personal pension account number to each new employee,
• deducting NPS contributions from each employee's salary on a monthly basis,
• transferring the employee and matching government contributions to the Public Account,
• channeling information on each employee's monthly contributions to the Central Pension Accounting Office (CPAO) which is serving as the interim central recordkeeping agency (CRA), and
• delivering the NPS account statements issued by the CPAO to each employee covered by the NPS.
Establishment of the new administrative arrangement for NPS was initiated over 20 months ago by the Department of Economic Affairs (DEA).
NPS Adoption by State Governments
Since March 2003, sixteen state governments including Andhra Pradesh , Assam , Bihar Chhatisgarh, Goa , Gujarat , Himachal Pradesh, Jharkhand, Maharashtra , Madhya Pradesh, Manipur, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttaranchal have notified a revision in their respective pension and GPF rules and announced a similar DC pension scheme for their own new employees. Several other states are presently evaluating a similar option for their own new employees. The World Bank and the Asian Development Bank have offered technical assistance to these states for migrating to the NPS architecture as well as for estimating their pension liabilities and evaluating parametric and/or systemic reforms for existing employees.
Legislative Framework for NPS
The central government introduced the PFRDA Bill, 2005 during the 2005-06 Budget Session. This Bill is meant to enable suitable legislation for establishing the PFRDA as a statutory body and will enable the GOI to offer the NPS (though without a matching government contribution) to the remaining workforce which is not already covered by any legislated pension or PF scheme. Unlike central government employees, these workers are expected to avail of this scheme on a voluntary basis. On passage of the Bill, the PFRDA will establish the institutional architecture for NPS by appointing the CRA, PFMs and POPs. This process of engaging service providers and developing the administrative and recordkeeping capability is expected to take several months.
Migrating to the Final NPS Institutional architecture
Once the NPS institutional architecture is in place, the CPAO will transfer the stock of UIDs and member records on contributions and account balances to the CRA. The GOI will transfer the employee contributions from the Public Account to the pension fund managers (PFMs) and schemes selected by each employee. The payroll arms of the central government will however continue to operate the NPS administrative arrangement and deliver contributions and member information (including choice of PFM and scheme) to the CRA on an ongoing basis.
In this context, simultaneously with the process of implementing the NPS institutional architecture, the Government of India and the PFRDA need to strengthen and streamline the internal administrative arrangement at the centre and states and broaden the scope of the interim CRA. It is essential that non-civil departments, as well as UTs and autonomous bodies also link up to the interim CRA so that the process of UID issuance as well as warehousing of NPS member data is centralised to avoid duplications and strengthen compliance.
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