Pension Fund Regulatory and Development Authority (PFRDA) and National Pension System

   Government of India constituted an Expert Committee for Old Age Social and Income Security (OASIS) in 1998 which submitted its report in 2000. In its report it pointed out that number of elderly people is likely to be 8.9% of the population in 2016 and 13.3% in 2026. Considering this large percentage the Committee recommended a new pension scheme covering both employees as well as self employed persons, in which the savings made by these individuals during their working years would be used for providing them pension after their retirement age. The Committee also suggested architecture for the scheme with PF Managers, Points of Presence, and Centralized Recordkeeping Agency etc and also recommended a strong regulatory body.

       In accordance with these recommendations, the Government of India set up “Pension Fund Regulatory and Development Authority (PFRDA)” on 23^rd August, 2003. By an executive order dated 10^th October, 2003, it was mandated to act as a regulator of pension funds in India.  The Authority has been recently granted legal status through PFRDA Act 2013 which came into force on 19^th September 2013. As per this Act, the Authority shall comprise of a Chairperson, three full time members and three part time members. The Act also provides that PFRDA will look after National Pension System or any other scheme not regulated by any other enactment. Schemes regulated by other enactments like (i) the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948; (ii) the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952; (iii) the Seamen’s Provident Fund Act, 1966; (iv) the Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955; and (v) the Jammu and Kashmir Employees’ Provident Funds Act, 1961 have been excluded from the provisions of the Act as are the Central Government employees appointed before 1^st January 2004.

Earlier Scenario

Prior to PFRDA, benefit of pensions had been limited to the Government sector. This was a Fixed Benefit Scheme as it meant giving a fixed sum to the employee on the basis of length of service and last pay drawn. However, as the pension had to be paid out of the Government funds at a much higher rate than the contributions and as the number of retired employees steadily grew, the pension started becoming a burden on the Government exchequer. A small section in the organized private sector received some amount in the form of Provident Fund or some other benefits. However, no pension was available to the employee apart from this amount. However, these sections constituted a small part of the population and sizeable section of the population did not have any social security scheme to fall back in their old age. These problems required devising of a scheme in which an employee or any other individual could provide for his own pension through savings made during his working years.

  

National Pension System

            In order to address these problems the Government launched the National Pension System. The system is a Fixed Contribution Scheme and amount of benefit received by the employee at the time of retirement depends upon the amount contributed by the employee and wealth earned after investment of this contribution. The scheme was made mandatory for all those Government Employee who have entered the service on or after 1.1.2004. The scheme was opened for all citizens in 2009, but is not mandatory for them. Main features of New Pension Scheme are as under:

• The scheme is available for Indian citizens only and is being looked after by the NPS Trust. Central Records Agency, Trustee Bank, Asset Holding Company, Pension Fund Managers, Points of Presence and Annuity Service Providers are other entities of the Scheme.
• NSDL e-Governance Infrastructure Ltd. has been made the Central Records Agency and Bank of India is to function as the Trustee Bank for the scheme.
• Number of Pension Fund Managers has not been restricted and is updated from time to time. However, presently eight companies have been authorized to work as Pension Fund Managers which have offered similar number of Pension Funds. Subscriber will have the option to choose his PFM as well as the schemes.
• Each individual will open an account with the Pension Fund Manager (PFM) and select a scheme. Each scheme will have Two Tiers. First one shall be a mandatory, non-withdrawable pension account for which minimum contribution shall be Rs.500/- per contribution. Minimum contribution per annum would be Rs.6000/- and every subscriber shall have to make at least one contribution per annum. A Tier-II account shall be an optional, withdrawable account with an aim to provide liquidity to the beneficiary. However, an active Tier-I account is a pre requisite for opening a Tier-II account.
• On exiting from the NPS, a fixed percentage of the amount in the account of the subscriber would be used to buy annuity which would provide pension to the beneficiary for the rest of his life. Percentage of this amount would depend upon the age in which the subscriber exits. In case of death, whole amount would be given to his nominee.
• Service providers like Central Record Keeping Agency, Points of Presence, Trustee Bank, Pension Fund Managers etc. are entitled to certain charges which are either collected upfront or as deductions from NAVs.
• Offer document of the Scheme makes it amply clear that there are no guarantees on the scheme and the investments are subject to market and other risks. There is no guarantee that investment objectives shall be achieved.
• Another model of National Pension Scheme i.e. NPS Lite was launched for lower income group people in 2010. One can register in the scheme with a minimum contribution of Rs.100/-. There is no annual minimum subscription, though the offer document recommends that contributions of at least Rs.1000/- per annum should be made. The scheme is simpler and has lower administrative charges.
• In order to promote NPS among the unorganized workers, the Government has launched Swavlamban scheme. Government will contribute Rs.1000/- per annum in the NPS account of the subscriber for four years starting from 2010-11 onwards subject to the condition that the per annum contribution of the subscriber in the scheme is minimum Rs.1000/- and maximum Rs.12, 000/-.
• In order to popularize NPS among corporate, NPS-Corporate Model was launched in December, 2011. This model would provide a platform to the corporate to co-contribute in the pension fund of employees. While the corporate would be granted tax exemptions, the employees would have better choice of investments of their funds.   

FDI in pension fund

            In India, FDI has always been a politically sensitive issue. Certain political sections are opposed to FDI, though this may not have much sense. Pension market has already been opened to private players and the funds are already being invested into the market. Collaborating as well as non collaborating companies are equally susceptible to market risks and it may not be of much concern to the subscriber. Further, the Government needs FDI, primarily for investment in infrastructure. As per a study conducted by ASSOCHAM published in January 2012, an expenditure of one trillion dollars would be required to be invested in infrastructure during the 12^th five year plan i.e. 2012-17. This demand would be difficult to be met from local resources and FDI provides a possible solution. The study also states that Pension Funds across the world hold a capital of 16.2 trillion dollars and even if India is able to tap 1% or 2% of this amount, it would ease the situation substantially.  This is quite possible as the Indian market has hitherto remained untapped in the pension sector and can attract the interest of the investors. Considering these factors, the Government has brought FDI in the pension sector. Section 24 of the PFRDA Act 2013 provides for foreign equity in pension up to a limit of 26% or such percentage as approved for an Indian Insurance Company.  The Government has also introduced The Insurance Laws (Amendment) Bill, 2008 which provides for FDI in insurance sector up to 49%. If passed, this would also raise the limits of FDI in pension funds.  

Present Status

            As per data of PFRDA as on 7^th May 2013, there were about 49.90 lakh NPS subscribers. Out of these about 28.4 lakhs have been from the Government sector (both Central and the State Governments) and 19.23 lakhs are NPS Lite accounts. Subscribers from private sector are only about 2.27 lakhs. This shows some lack of confidence in these schemes in some sections. This is also borne by the fact that against about 50 lakh subscribers only 8817 Tier-II accounts have been activated.

            This could be due to a number of reasons. First could be that the scheme provides no guarantee whatsoever, not even like the assured sum given by most life insurance companies after maturity of the policy. Another reason could be that there is no clarity on the amount of pension which a subscriber would get as the same would depend upon the pension wealth which in turn would depend on NAV of the fund and hence on the share market. As share market is highly volatile, pension wealth of the subscriber is likely to fluctuate for a number of reasons with which he is not even remotely connected. Political instability, terrorist attacks, natural calamities and similar other things take a toll on the share market and subscribers retiring at those points of time will suffer heavily. Last but not the least, the amount of benefit received by a subscriber would depend on the performance of Fund Managers. Subscribers in some of the funds would receive less than others because their fund managers had not made investments that efficiently.

           NPS has relieved the Government of the burden of paying pension to its employees and hence is going to stay in the public sector. However, its prospects in the private sector would depend upon the performance of various entities particularly the Fund Managers. As investments in the pension sector are long term and scheme is still at a nascent stage, it is difficult to judge the performance of fund managers at this stage. This will become clear only in the times to come when the subscribers would actually receive the benefits.