Analysis of New Pension System (NPS)

In addition to Public Provident Fund (PPF) or pension schemes of life insurance companies, the New Pension System (NPS) will help you save for your retirement. Absolutely anyone can participate in it! The New Pension System is available to all citizens of India from 1st May, 2009.

Government employees have long enjoyed the benefit of getting a pension post-retirement. Some good private sector companies also offer a pension to their employees after they retire.

Till now, self employed as well as employees of private companies did not had many choices for getting a pension. These people have been depending on schemes like Public Provident Fund (PPF) or pension schemes of life insurance companies to save for their retirement. Now, there is a new ray of hope – in the form of the New Pension System (NPS).

Overview of New Pension System

The foundation of the New Pension System was laied in the Project Oasis Report (Old Age Social and Income Security Project). The New Pension System is based on individual retirement accounts. Overview of the New Pension System at a concept level is as follows :

• An individual should create retirement account;
• have a passbook where he can see the balance that is his notional wealth at that point in time;
• he should control how this wealth is managed;
• this account should stay with him regardless of where he is or how he works.
• He would make contribution towards his pension into this account through his working life (whether employed in the organised sector or not), and
• obtain benefits from it after retirement for the rest of his life.

Pension Regulatory Framework 

The New Pnsion System will be governed and regulated by Pension Fund Regulatory and Development Authority (PFRDA).  PFRDA was established by the Government of India on 23rd August 2003 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. PFRDA defines the NPS Architecture as follows :

Main Features and Architecture of the New Pension System

• The new pension system would be based on defined contributions. It will use the existing network of bank branches and post offices etc. to collect contributions. There will be seamless transfer of accumulations in case of change of employment and/or location. It will also offer a basket of investment choices and Fund managers. The new pension system will be voluntary.
• The system would, however, be mandatory for new recruits to the Central Government service (except the armed forces). The monthly contribution would be 10 percent 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 returns thereon would be deposited in a non-withdrawable pension account. The existing provisions of defined benefit pension and GPF would not be available to the new recruits in the central Government service.
• In addition to the above pension account, each individual can have a voluntary tier-II withdrawable account at his option. Government will make no contribution into this account. These assets would be managed in the same manner as the pension. The accumulations in this account can be withdrawn anytime without assigning any reason.
• Individuals can normally exit at or after age 60 years from the pension system. At exit, the individual would be required to invest at least 40 percent of pension wealth to purchase an annuity. 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 she would be free to utilize 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.
• There will be one or more central record keeping agency (CRA), several pension fund managers (PFMs) to choose from which will offer different categories of schemes.
• The participating entities (PFMs, CRA etc.) would give out easily understood information about past performance & regular NAVs, so that the individual would able to make informed choices about which scheme to choose.

Entities involved in the New Pension System

The NPS would be administered by the Pension Fund Regulatory Development Authority (PFRDA).

Central Recordkeeping Agency (CRA)

A Central Recordkeeping Agency (CRA) would maintain all the records related to the NPS. National Security Depository Limited (NSDL) has been selected as the nationwide CRA for the New Pension System.

Each investor in the NPS would be allotted a Permanent Retirement Account Number (PRAN). This would be a unique identification number that would be used to identify an investor irrespective of his PFM. The PRAN would be issued to investors by the RCA (i.e., NSDL).

Pension Fund Managers (PFMs)

There would be six Pension Fund Managers (PFMs). The PFM would be responsible for investing your funds and generating returns from them.

List of Pension Fund Managers (PFMs) :

• ICICI Prudential Life Insurance Company Limited
• IDFC Asset Management Asset Management Company Limited
• Kotak Mahindra Asset Management Company Limited
• Reliance Capital Asset Management Company Limited
• SBI Pension Funds Limited
• UTI Retirement Solutions Limited

Points of Presence (PoPs)

There are also entities called Points of Presence (PoPs). The PoP would be responsible for the sales and marketing of the NPS. (These are similar to the distributors for mutual funds).

List of Points of Presence (PoP) entities

• Allahabad Bank
• Axis Bank Ltd.
• Bajaj Allianz General Insurance Co Ltd.
• Central Bank of India (CBI)
• Citibank N.A.
• Computer Age Management Services Private Ltd.
• ICICI Bank Ltd.
• IDBI Bank Ltd.
• IL&FS Securities Services Ltd.
• Kotak Mahindra Bank Ltd.
• Life Insurance Corporation of India (LIC)
• Oriental Bank of Commerce (OBC)
• Reliance Capital Ltd.
• State Bank of Bikaner & Jaipur (SBBJ)
• State Bank of Hyderabad
• State Bank of India (SBI)
• 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 (UBI)
• UTI Asset Management Company Ltd.

New Pension System Investment Guidelines

Pension Fund Managers will manage 3 separate schemes, each investing in a different asset class. These assets classes are

1. Equity,
2. Government securities and
3. Credit risk bearing fixed income instruments.

On the basis of the recommendations of the NPS Trust and on advice from the Government, it has been decided that investment by an NPS participant in equity would be subject to a cap of 50 per cent.

Also the fund managers will invest only in index funds that replicate either BSE sensitive index or NSE Nifty 50 index. The subscriber will have the option to actively decide as to how the NPS pension wealth is to be invested in three asset class.

In case the subscriber is unable/unwilling to exercise any choice as regards asset allocation, his/her contribution will be invested in accordance with the ‘Auto choice’ option. In this option the investment will be determined by a predefined portfolio.

At the lowest age of entry (18 years) the auto choice will entail investment of 50 % of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in ” E” and ” C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in ” E”, 10% in “C” and 80 % in ” G” class at age 55.

Conclusion

We will continue our analysis of New Pension system vis-a-vis other related retirement planning avenues available such as EPF, PPF, ULIPs, and Mutual Funds. For now, the New Pension System seems to be a great product for taking control of your Retirement Account. However, the comman person might not understand the complexities involved. There are some good features and some key dampners as well in the New Pension System, here is a summary for you :

• Extremly long term : Contributions to the NPS can be withdrawn only at the age of 60. Even then only 60% can be withdrawn as a lumpsum and the balance constructed as an annuity. Although, PFRDA will launch the withdrawable NPS accounts in about six months.
• No guaranteed returns : Another aspect which has not gone very well with the Left Parties is the absense of guaranteed returns. Although, this was expected as Governement as well as Public and Private Sector Financial Institutions are discouraging guaranteed returns and adopting market based return as a norm. The NPS too will operate on market based returns.
• Too Confusing for a lay-invstor : Investors need to choose their PoP, their Pension Fund Manager (PFM) as well as the Investment Option and even the Asset Allocation. Improperly filled applications would be rejected. This is too much to expect for individual investors who untill recently was not even aware about Retirement Planning.
• No tax benefits as of now : The NPS is currently EET (exempt-exempt-taxable) and not EEE (exempt-exempt-exempt). This is a dampener, which PFRDA will work hard to set right.
• Will PoPs sell NPS? : Investment products, especially insurance ULIPS and Mutual Funds, are sold not bought. There is a considerable advisory effort before a sale is made. Like PPF, will NPS too become a great scheme which is not agressively sold by the PoPs?
• Inertia : Before an investor can make her first contribution to NPS, she has to get her Permanent Retirement Account Number (PRAN) and fill a lengthy form indicating all choices. Again, the PoP needs to make things smooth and easy to facilitate transactions.