Indian Pension Sector Encyclopedia
From Indiapensions
http://www.textboeldomelts.com India does not have a comprehensive old age income security system. There are however, some mandatory schemes for employees of State and Central governments, employees of public sector banks, employees in firms with a staff of 20 or more and some others. In recent years, the insurance and the mutual fund industry in India has also started offering pension plans. In 2004, a new defined contribution individual account pension system was constituted for Central government employees recruited after January 1, 2004. This will soon be open for all citizens of India on a voluntary basis.
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Existing pension arrangements
Formal sector pensions
Formal sector pensions in India can be divided into three categories; viz those schemes that come under an Act or Statute, Government pensions and voluntary pensions.
Pensions under an Act
There are three defining Acts for pensions in India. These are the
- Pensions under the EPF&MP Act 1952. These include the
- Pensions under the Coal mines PF&MP Act 1948. These include
There are other provident funds in India. These are
- Assam Tea Plantations PF
- J&K PF
- Seamens PF
Government pensions
Government pensions in India are defined under the Directive Principles of State policy and are therefore not under a Statute. The Government ammended the regulations to put in place the new pension system. The old scheme continues for the existing employees (i.e. those who joined service prior to January 1, 2004). Pensions for government employees would include employees of the central as well as the state governments.
- Central government pensions
Bank pensions
- Reserve Bank of India (RBI)
- Public sector banks
- National Bank for Agriculture and Rural Development (NABARD)
- Other banks pensions
Voluntary pensions
- Superannuation schemes
- Plans sold in the market. These are typically plans sold by
Life Insurance
Informal sector pensions
The Government has stepped up its efforts to extend coverage of formal pension arrangements to the nearly 350 million informal sector workers. In this direction, the Department of Economic Affairs, Ministry of Finance, India has recently finalised a technical assistance project with the Asian Development Bank (ADB) to formulate appropriate policies and institutional arrangements to motivate these excluded workers to voluntarily participate in formal retirement plans. This project (awarded to a consortium of UNSW and IIEF) will assist the policymakers and the PFRDA in achieving greater clarity on the specific needs and constraints of this audience and in designing appropriate products, access and delivery mechanisms as well as benefit and exit policies which can serve India's huge, widespread and diverse informal sector workforce.This project targets self-employed professionals, contract and casual labor, agricultural workers, farmers, women workers, etc. and includes a nation-wide random survey of 42,000 households.
Existing arrangements applicable to informal sector
New Pension System (NPS)
The New Pension System (NPS) introduced by the Government of India is South Asia's first DC pension scheme with individual retirement accounts, product choices, professional fund management by competing private fund managers and portability through centralised recordkeeping and administration. Participation in this scheme is mandatory for all new employees of the Central Government (excluding armed forces). This scheme will be offered to other employers and workers including State Governments and informal sector workers after a few months. The Department of Economic Affairs (DEA) under the Ministry of Finance has been charged with the responsibility of setting up the Pension Fund Regulatory and Development Authority (PFRDA) and implementing the legislative, policy, regulatory and institutional framework for the NPS.
In parallel, almost all State Governments are becoming increasingly conscious about questions of design and fiscal sustainability of the retirement benefits for their own employees and pensioners. 16 Indian states have already decided to adopt the NPS for their own new employees while several other States are actively considering this option. A number of State Governments are also considering wider reforms and improvements to retirement provisions for their existing employees. However,a majority of States are waiting for the regulatory and institutional capacity of the new Central Government pension system to be in place before they formally announce a strategy for their own civil servants.
A Country-wise Comparison of Pension Systems for Select South Asian Countries
Comparing the prevailing Pension system in India with those existing in Bangladesh, Pakistan and Sri Lanka,it can be seen that most pension schemes in the sub-continent run on similar lines. Civil servants in all these countries are covered under varying pension schemes. Moreover, in most of the countries under considertion, pension schemes exist for the private sector workers also.
Recent developments in India's pension sector
2007
NSDL selected as NPS Central Recordkeeping Agency (CRA)
The Pension Fund Regulatory and Development Authority (PFRDA) and National Securities Depository Limited (NSDL) entered into a formal agreement on 26th November 2007 relating to the setting up of a CRA for the NPS. NSDL's appointment as CRA is for ten years.
The main functions and responsibilities of the CRA shall include:
(i) Recordkeeping, Administration and customer service functions for all subscribers of the NPS. (ii) Issue of unique Permanent Retirement Account Number (PRAN) to each subscriber, maintaining a database of all PRANs issued and recording transactions relating to each subscriber's PRAN. (iii) Acting as an operational interface between PFRDA and other NPS intermediaries such as Pension Funds, Annuity Service Providers, Trustee Bank etc.
CRA Fees & Charges leviable by NSDL.
1. Annual fee of Rupees Ten lakh.
2. Account opening charge of Rs.50 for each member account
3. Annual Maintenance Charges and Transaction Charges
a) Till such time as the number of accounts with the CRA reaches ten lakh
i) Account maintenance charges: Rs 350 per account per annum
ii) Transaction charges: Rs 10 per transaction
b) After ten lakh accounts till such time the number of accounts with the CRA reaches thirty lakh
i) Account maintenance charges: Rs 280 per account per annum
ii) Transaction charges: Rs 6 per transaction
c) Beyond thirty lakh accounts
i) Account maintenance charges: Rs 250 per account per annum
ii) Transaction charges: Rs 4 per transaction
The Central Government have decided to bear these charges in respect of their employees covered under the NPS.
Selection of Fund Managers under NPS
PFRDA has appointed, through a process of competitive bidding, State Bank of India (SBI), UTI Asset Management Company (UTI-AMC) and Life Insurance Corporation (LIC) as Pension Fund sponsors under the NPS. LIC have already incorporated their Pension Fund and SBI and UTI -AMC are expected to complete the process by 15th of December 2007.
Once the NPS architecture becomes fully operational, the NPS corpus of Central Government employees will be distributed amongst the three Pension Funds based on the initial investment management fee and transaction based charges quoted by these entities. The three entities will be performing the investment management functions for a fee varying from three to five basis points. The appointment of the Pension Funds shall be for a period of three years. The arrangements relating to distribution of NPS corpus shall, however, be reviewed at the end of each year based on the returns on investment generated by each Pension Fund Manager (PFM) and the investment management fee quoted.
Investment Options for members under NPS
At the initial stages, there shall be two Investments options available under the NPS. The subscribers shall have the option of having their pension contributions either invested fully in Government bonds and securities or in accordance with the investment guidelines for non-Government Provident Funds issued by Government of India vide their notification dated 24th January, 2005. The said notification allows investment of funds upto 5% into equity and another 10% in equity linked mutual funds.
Selection of Project Management Consultant
PFRDA has selected Wipro Technologies as Project Management Consultants (PMCs) on 31st August 2007 for a period of 18 months effective 12th November, 2007 at a cost Rs. 63,00,000 (Rs. Sixty three lakhs only) plus applicable taxes. Technical and commercial bids were received from six of these entities namely M/s Wipro Technologies, Ernst & Young, NSE-IT, Infosys, PWC & Engineers India Ltd.
PFRDA website created in 2007
In keeping with its objective of bringing in greater transparency in its decision making process, PFRDA is committed to release more and more information in public domain.
Pension Fund Regulatory and Development Authority maintains an active website (URL: http://www.pfrda.org.in). All the information released by PFRDA is simultaneously made available on the website in pdf and Word formats.
The details of information that is already available on PFRDAâs Website (http://www.pfrda.org.in) are:-
- Details pertaining to composition of PFRDA, present Board Members and official of the PFRDA
- PFRDA Bill, 2005
- Preliminary Draft Regulations
- Various notifications issued by the Government of India and State Governments
- Architecture of the New Pension System
- Various policy and research papers
- Press releases by the Government of India and PFRDA
- Results of survey by ORG Marg-A C Neilson on pension reforms for unorganised sector
- Report of the Standing Committee on PFRDA Bill,2005
PFRDA Preliminary Draft Regulations - September, 2005
February 2005
- The decision to table the new pensions legislation was announced in the Budget Speech, 2005-06.
- The Left was vehemently opposed to it and the Congress chose to not take the risk of putting the bill to vote. Some newspapers say that pensions was sacrificed to make it possible for the patents bill to pass.
- This bill got referred to the Parliamentary Standing Committee on Finance.
- The way this works in theory is that the Standing Committee writes a report on the bill. Then the modified bill goes back to vote. Parliament is supposed to be better informed owing to the report. The way it works in practice is that a deal is made about what changes will be made to the bill.
- The day after these events, Dhirendra Swarup was appointed as the head of PFRDA for a term of five years. This is seen as a signal of the administration's commitment to the project.
Pensions in state governments
The process of adoption of the New Pension Scheme by state governments for their own civil service staff is proceeding quite fine. Right now,19 states have signed up for it. These include
| State | Notified | Effective Date |
|---|---|---|
| Himachal Pradesh | May 15, 2003 | May 15, 2003 |
| Tamil Nadu | August 6, 2003 | April 1, 2005 |
| Rajasthan | January 28, 2004 | January 1, 2004 |
| Andhra Pradesh | September 22, 2004 | September 1, 2004 |
| Chattisgarh | October 27, 2004 | November 1, 2003 |
| Jharkhand | December 9, 2004 | December 1, 2004 |
| Manipur | December 31, 2004 | January 1, 2005 |
| Assam | January 25, 2005 | February 1, 2005 |
| Gujrat | March 18, 2005 | April 1, 2005 |
| Uttar Pradesh | March 28, 2005 | April 1, 2004 |
| Madhya Pradesh | April 13, 2005 | January 1, 2005 |
| Goa | August 5, 2005 | August 5, 2004 |
| Bihar | August 31, 2005 | September 1, 2005 |
| Orissa | September 17, 2005 | January 1, 2005 |
| Uttaranchal | October 25, 2005 | October 1, 2005 |
| Maharashtra | October 31, 2005 | November 1, 2005 |
| Delhi | ||
| Haryana | ||
| Karnataka |
2004
- 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.
- The Ministry of Finance revised the investment guidelines for Provident Funds in India. The PFs are now allowed to invest upto 5% in equity.
- The Government announced a hike of one percent in the Employees Provident Fund (EPF) interest rate to 9.5% for 2004-05. However, in January 2006 the interest rate was reduced to 8.5%.
2007
NSDL selected as NPS Central Recordkeeping Agency (CRA)
The Pension Fund Regulatory and Development Authority (PFRDA) and National Securities Depository Limited (NSDL) entered into a formal agreement on 26th November 2007 relating to the setting up of a CRA for the NPS. NSDL's appointment as CRA is for ten years.
The main functions and responsibilities of the CRA shall include:
(i) Recordkeeping, Administration and customer service functions for all subscribers of the NPS. (ii) Issue of unique Permanent Retirement Account Number (PRAN) to each subscriber, maintaining a database of all PRANs issued and recording transactions relating to each subscriber's PRAN. (iii) Acting as an operational interface between PFRDA and other NPS intermediaries such as Pension Funds, Annuity Service Providers, Trustee Bank etc.
CRA Fees & Charges leviable by NSDL.
1. Annual fee of Rupees Ten lakh.
2. Account opening charge of Rs.50 for each member account
3. Annual Maintenance Charges and Transaction Charges
a) Till such time as the number of accounts with the CRA reaches ten lakh
i) Account maintenance charges: Rs 350 per account per annum
ii) Transaction charges: Rs 10 per transaction
b) After ten lakh accounts till such time the number of accounts with the CRA reaches thirty lakh
i) Account maintenance charges: Rs 280 per account per annum
ii) Transaction charges: Rs 6 per transaction
c) Beyond thirty lakh accounts
i) Account maintenance charges: Rs 250 per account per annum
ii) Transaction charges: Rs 4 per transaction
The Central Government have decided to bear these charges in respect of their employees covered under the NPS.
Selection of Fund Managers under NPS
PFRDA has appointed, through a process of competitive bidding, State Bank of India (SBI), UTI Asset Management Company (UTI-AMC) and Life Insurance Corporation (LIC) as Pension Fund sponsors under the NPS. LIC have already incorporated their Pension Fund and SBI and UTI -AMC are expected to complete the process by 15th of December 2007.
Once the NPS architecture becomes fully operational, the NPS corpus of Central Government employees will be distributed amongst the three Pension Funds based on the initial investment management fee and transaction based charges quoted by these entities. The three entities will be performing the investment management functions for a fee varying from three to five basis points. The appointment of the Pension Funds shall be for a period of three years. The arrangements relating to distribution of NPS corpus shall, however, be reviewed at the end of each year based on the returns on investment generated by each Pension Fund Manager (PFM) and the investment management fee quoted.
Investment Options for members under NPS
At the initial stages, there shall be two Investments options available under the NPS. The subscribers shall have the option of having their pension contributions either invested fully in Government bonds and securities or in accordance with the investment guidelines for non-Government Provident Funds issued by Government of India vide their notification dated 24th January, 2005. The said notification allows investment of funds upto 5% into equity and another 10% in equity linked mutual funds.
Selection of Project Management Consultant
PFRDA has selected Wipro Technologies as Project Management Consultants (PMCs) on 31st August 2007 for a period of 18 months effective 12th November, 2007 at a cost Rs. 63,00,000 (Rs. Sixty three lakhs only) plus applicable taxes. Technical and commercial bids were received from six of these entities namely M/s Wipro Technologies, Ernst & Young, NSE-IT, Infosys, PWC & Engineers India Ltd.
PFRDA website created in 2007
In keeping with its objective of bringing in greater transparency in its decision making process, PFRDA is committed to release more and more information in public domain.
Pension Fund Regulatory and Development Authority maintains an active website (URL: http://www.pfrda.org.in). All the information released by PFRDA is simultaneously made available on the website in pdf and Word formats.
The details of information that is already available on PFRDAâs Website (http://www.pfrda.org.in) are:-
- Details pertaining to composition of PFRDA, present Board Members and official of the PFRDA
- PFRDA Bill, 2005
- Preliminary Draft Regulations
- Various notifications issued by the Government of India and State Governments
- Architecture of the New Pension System
- Various policy and research papers
- Press releases by the Government of India and PFRDA
- Results of survey by ORG Marg-A C Neilson on pension reforms for unorganised sector
- Report of the Standing Committee on PFRDA Bill,2005
PFRDA Preliminary Draft Regulations - September, 2005
February 2005
- The decision to table the new pensions legislation was announced in the Budget Speech, 2005-06.
- The Left was vehemently opposed to it and the Congress chose to not take the risk of putting the bill to vote. Some newspapers say that pensions was sacrificed to make it possible for the patents bill to pass.
- This bill got referred to the Parliamentary Standing Committee on Finance.
- The way this works in theory is that the Standing Committee writes a report on the bill. Then the modified bill goes back to vote. Parliament is supposed to be better informed owing to the report. The way it works in practice is that a deal is made about what changes will be made to the bill.
- The day after these events, Dhirendra Swarup was appointed as the head of PFRDA for a term of five years. This is seen as a signal of the administration's commitment to the project.
Pensions in state governments
The process of adoption of the New Pension Scheme by state governments for their own civil service staff is proceeding quite fine. Right now,19 states have signed up for it. These include
| State | Notified | Effective Date |
|---|---|---|
| Himachal Pradesh | May 15, 2003 | May 15, 2003 |
| Tamil Nadu | August 6, 2003 | April 1, 2005 |
| Rajasthan | January 28, 2004 | January 1, 2004 |
| Andhra Pradesh | September 22, 2004 | September 1, 2004 |
| Chattisgarh | October 27, 2004 | November 1, 2003 |
| Jharkhand | December 9, 2004 | December 1, 2004 |
| Manipur | December 31, 2004 | January 1, 2005 |
| Assam | January 25, 2005 | February 1, 2005 |
| Gujrat | March 18, 2005 | April 1, 2005 |
| Uttar Pradesh | March 28, 2005 | April 1, 2004 |
| Madhya Pradesh | April 13, 2005 | January 1, 2005 |
| Goa | August 5, 2005 | August 5, 2004 |
| Bihar | August 31, 2005 | September 1, 2005 |
| Orissa | September 17, 2005 | January 1, 2005 |
| Uttaranchal | October 25, 2005 | October 1, 2005 |
| Maharashtra | October 31, 2005 | November 1, 2005 |
| Delhi | ||
| Haryana | ||
| Karnataka |
2004
- 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.
- The Ministry of Finance revised the investment guidelines for Provident Funds in India. The PFs are now allowed to invest upto 5% in equity.
- The Government announced a hike of one percent in the Employees Provident Fund (EPF) interest rate to 9.5% for 2004-05. However, in January 2006 the interest rate was reduced to 8.5%.
