New Pension Scheme: Choose plan to suit risk profile

New Pension Scheme: Choose plan to suit risk profile

Under the New Pension Scheme (NPS), investors save money which is put into the capital market. The sum which you will get after retirement will be dependent on the performance of the capital market. You can make monthly or weekly contributions to the NPS. But for every contribution, your transaction cost will increase.

Prior to NPS, there was the Defined Benefit Plan -one would get certain pension fixed for life. The postretirement proceeds were fixed and if there is a shortfall in this corpus, the government would make good.

NPS is a Defined Contribution Plan where the returns will not be fixed. You will only get what you have contributed and returns that the fund manager generates on it. All new entrants to the central government services (other than armed forces) after January 1, 2004, will compulsorily join this scheme. All citizens, including NRIs, aged 18 to 60 can voluntary join the scheme. The exit age is 60 years.

A minimum contribution of Rs 6,000 is compulsory per year. The minimum amount per contribution is Rs 500 and a minimum of four contributions in a year for each subscriber account is required.

Under the NPS, each subscriber is allotted a unique 16-digit Permanent Retirement Account Number (PRAN). This number is portable. The records of transactions are maintained by the Central Record Keeping Agency (CRKA). The subscriber has the option to invest with seven pension fund managers (PFMs). He also has the option to choose any one or more PFMs to manage his contribution. These PFMs will have three kind of funds categorised as 'E' for equity funds, 'G' for funds investing in government securities and 'C' for fixed income securities other than government securities.

There are two types of accounts:

Tier I account where you cannot withdraw

The Tier I account is the basic NPS account that is non-withdrawable till retirement or death of the subscriber. In this account, the total corpus at retirement age is split, where a minimum of 40 percent of the final corpus has to be compulsorily used to buy an annuity while the subscriber is free to withdraw the remaining 60 percent as a lump sum or in instalments.

Tier II account where you can withdraw

The Tier II account is available to only to those who are existing subscribers of the Tier I account. The money contributed into this account can be freely withdrawn as and when the subscriber wishes to except for a minimum balance that needs to be maintained at the end of each financial year.

Charges

The NPS levies an investment charge of .00009 percent of the assets under management. Initial charges of account opening is around Rs 470. From the second year onward the charges are Rs 350 per annum. Also, a charge of Rs 10 is applicable for each transaction. One can make monthly or weekly contributions. But for every contribution, your transaction cost will increase.

Fund managers

These are managed by fund managers. Currently, seven fund houses appointed by the government are available under the NPS.

These are:
LIC Pension Fund Limited SBI Pension Funds Pvt Limited UTI Retirement Solutions Limited IDFC Pension Fund Management Company Limited ICICI Prudential Pension Funds Management Company Limited Kotak Mahindra Pension Fund Limited Reliance Capital Pension Fund Limited

Schemes

There are three schemes available under the NPS.

Fund C

In case you invest in this fund, all the money will be invested in fixed income instruments such as corporate bonds and government securities. One should consider investing in this fund if the risk appetite is medium as corporate bonds are not that risky.

Fund E

In case one invests in this fund, a portion of not more than 50 percent of the invested money will be put in equity. You should choose this retirement plan only if your risk appetite is high, as up to 50 percent of your money will be linked to the performance of equity.

Fund G

In this case, all your money will be invested in government securities. Hence, this is suited for risk-averse investors. One can choose to invest in any of these funds. You may also invest in a mix of these funds. If you do not choose between these funds, your contributions will be invested in a fund with 15 percent in equity, 45 percent in corporate bonds and 40 percent in government bonds. With increase in age, after 35 years, the government bond exposure will increase with a maximum limit of 80 percent and 10 percent each in equity and corporate bonds.

Fixed income pension plan

The government has proposed to extend the 'fixed income pension plan' to workers in the unorganised sector. The monthly contributions one makes will be invested as per NPS guidelines. The State funds for the savings scheme will be added to this. If any gap exists between the sum guaranteed and sum generated from the two steps, the central government will provide the required funds.

The new plan will be started off initially in Haryana, Karnataka and Andhra Pradesh. This amendment is meant only for workers in the unorganised sector. Central and State government employees will continue to get pension through NPS.

Tax benefit

Presently, NPS does not offer any tax exemptions unlike other retirement plans. It falls under the category of exempt-exempt-tax (EET) system which means that maturity benefits you receive after retirement will be taxable. However, with the Direct Tax Code coming in NPS will be tax exempted on withdrawal too.

Source: Economic Times

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Retailing of New Pension Scheme through Post Offices begins...

Disbursement Of Wages Through Post Offices Under NREGS expands

Retailing of New Pension Scheme through Post Offices begins

A Bouquet of Mutual funds “Ujjawal Bhavishya” in Post Offices Launched

The Department of Posts (DoP) opens about eight lakh new “Mahatma Gandhi NREGS’ accounts every month across the country. Till 30th June 2010 has DoP opened 4.48 crore accounts under the scheme and disbursed an amount of Rs. 3,406 crores in the current financial year. More than 95,000 post offices are engaged in disbursement of wages under MGNREGS.

In a tie up with Pension Fund Regulatory and Development Authority DoP has started retailing of New Pension Scheme (NPS) through post offices in the country. So far 5186 NPS accounts have been opened in Head Post Offices in 20 Postal Circles.

As a part of financial inclusion, the DoP in another tie up with UTI Mutual Fund has launched “Ujjawal Bhavishya”, a bouquet of mutual funds relating to Retirement Benefits Pension Fund, Mahila Unit Scheme and Children’s Carrer Balanced Funds in all post offices in the country. The scheme has the convenience of systematic investment plan. It will enable investors in small towns and cities to avail investment opportunities through post offices.

Source: PIB

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NPS has a tax edge, but watch out for annuities

NPS has a tax edge, but watch out for annuities

The New Pension Scheme (NPS) is likely to get a makeover if the revised Direct Tax Code is implemented. However, the government is doing its bit tolure investors to take a close look at the NPS. Recently, the government announced the ‘Swavalamban’ scheme through which it would add Rs 1,000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme in this financial year. Any NPS subscriber who invests Rs 1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get Rs 3,000 free from the government.

The likely DTC impact

The revised DTC, if implemented without any changes, will keep the NPS out of the tax net. This new change will make the NPS an attractive investment opportunity. The government has proposed EEE (exempt-exempt-exempt) method of taxation for NPS, which implies the NPS will be exempt from taxes at all the three stages of deposit, appreciation and withdrawal. Earlier, the NPS proceeds were taxable at maturity.

Advantages

One of the major advantages is also the lowest fund management charge, which is Rs 99 per lakh (0.0009%) compared to charges of a pension plan offered by an insurance company, which is around 0.75-1.75% per year. This low-cost structure makes it more attractive than most annuity/pension plans offered by insurance companies, financial advisors say. The custodian charges are in the range of 0.0075% to 0.05%. Despite all charges, the cost of investment is cheaper than charges of mutual find and ULIPs.

How does it work?

Investors have an option to choose their investment mix among three categories. The first one (E) refers to high investment exposure in equity, which targets investors with a high risk appetite. Equity investment, however, is capped at 50%, which mainly comprises index funds. The second option (C) is high exposure in fixed income instruments, which targets investors of a moderate risk profile. These instruments include liquid funds, corporate debt instruments, fixed deposits and infrastructure bonds. The last option is pure fixed investment products (G) which offer low returns. Ideally, you should start investing for your retirement in your early thirties. If you have the advantage of longer investment horizon (20 years plus), equity is the best option to start with. But in the case of the NPS, you have to buy a life annuity offered by life insurance companies. The NPS requires the investor to use the retirement corpus to buy annuities to avoid taxation. As per the existing stipulations, you have to invest 40% of the corpus in annuities.

Other alternatives

Annuity plans which don’t return the purchase price offer 8-9% and the ones that return the purchase price offer 50% a year are other options. Any bank deposits over five years, which offered 10% a couple years ago, offer around 8-8.5% today because of a decline in interest rates. There are other assured monthly income options like the Senior Citizens’ Savings Scheme (SCSS) which offer 9%, PPF at 15% and the post office monthly income scheme at 8%.
Courtesy : Economic Times

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Postal Department Launches New Pension Scheme for all.

Postal dept launches new pension scheme

The postal department has launched a new pension scheme for the public, specially service holders, who are able to deposit a minimum of Rs 500 per month, up to the age of 55 years.

According to the project officer of the postmaster general office, Saryug Prasad, the amount deposited by the beneficiaries would be invested in different unit-linked pension funds of the SBI, LIC, UTI and the quantum of pension would be fixed as per the amount earned from those deposited funds. He hoped the rate of pension amount would be higher than the present one.

He said the postal pension scheme has a two-tier provision. In the first tier, one can deposit a minimum of Rs 6,000 in a year in at least four instalments or Rs 500 per month. There would be no limit to subscriptions in any tier. The deposited amount would not be withdrawn prematuredly under the first-tier system.

But, under the two-tier system, a minimum of Rs 1,000 would have to be deposited and it would have the facility of premature withdrawals. It will work as a savings bank besides offering the benefit of pension.

Source; Times of India

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Parametric reforms of NPS merit consideration

Parametric reforms of NPS merit consideration

The mandatory New Pension System (NPS) has been applicable for the Central government employees since 2004. It mandates a contribution of 10% each from the covered civil servants and from the government, as an employer. The contribution base is the full salary.

The interim PFRDA (Pension Fund Regulatory and Development Authority) set up in 2003, has instituted a well-designed NPS architecture.

The 13th Finance Commission, which submitted its report on February 25, 2010, reported that 23 states have adopted the NPS for their civil servants. The total amount currently at Rs 12500 million is expected to increase rapidly.

While voluntary NPS for all Indian citizens with a minimum annual contribution of Rs 6,000 was made operational from May 2009, Swavlamban with a top-up of Rs 1,000 for members from the unorganised sector, is set to take off anytime now.

Both the mandatory and voluntary NPS require accumulations till age 60, with no pre-retirement withdrawals, enabling compounding effect to benefit members.

Recently, the interim PFRDA has raised the age of joining the NPS to 60 years from the previous 55 years.

The NPS charges and fees for services of the points of presence (PoP) and for the central recordkeeping agency (CRA) are flat and fixed. Therefore, they adversely impact members with short period of accumulations.

As an example, a member joining at the age of 59 contributing the minimum depositof Rs 500 pm and retiring at 60 would end up obtaining a negative 15.20% (annualised) return despite an assumed positive 10% growth by the pension fund due to a fixed cost of Rs780 in year one. However, as the balances grow, these charges become relatively less important.

Thus, for the NPS members who are contributing only minimum amount required, raising the age of joining to 60, but leaving other design parameters unchanged,(and ignoringSwavlamban contributions), is likely to result in negligible returns under plausible assumptions.

For those in the same age cohort contributing relatively large amounts annually to NPS (e.g. 2 lakh), it is the EET (Exempt at Investment, Exempt at Growth, and Taxed at withdrawals) which could result in negligible returns if the membership period is short. This is because whatever a member contributes between aged 57 - 59, is paid back at 60 as own taxable income.

Raising the age for joining the NPS by the PFRDA provides an opportunity to seriously consider the following parametric reform for the pay-out phase for both the mandatory and voluntary NPS.

It should be emphasised that these reforms should be considered as a package and not separately, though not all of them need to be introduced at the same time.

First, the mandatory annuity requirement may be reconsidered. A phased-withdrawal program, under which a member does not join an insurance pool, but retains the annuity component (40%) of accumulated balances in a special interest-bearing account, or senior- citizen- bond may be a possibility.

A member may be given options to withdraw principal plus interest every quarter for a period ranging from 10 to 20 years until the amount is exhausted. The bond could receive treatment similar to interest paid to senior citizens for fixed deposits.

All members may choose this option up to a prescribed amount (e.g. Rs 10 lakh in 2010 prices). This would enable disciplined and stable withdrawal of funds over the period chosen.

Alternatively, a member can opt to receive only interest / return as quarterly withdrawal in the initial period and withdraw accumulated balances in a phased manner at a later stage e.g. beginning at age 70.

Under the phased withdrawal, there is no insurance pool, so a member retains the ownership of balances and therefore nominees benefit in the event of member’s death.

PFRDA should encourage research and policy dialogue on phased withdrawal options appropriate for the NPS. This can also benefit micro-pension, and occupational pension plans.

Second, the age of ‘retirement’ from NPS could be made more flexible. Thus a member may chose to partially withdraw the accumulated balances as lump-sum (60%); purchase mandatory annuity and, as proposed above, invest in a phased withdrawal plan, at any time between the age of 60 and 70. This will have several advantages.

- It will permit individuals to enter NPS even between ages of 55 and 60, and still have sufficient time to accumulate retirement funds.

- It will provide flexibility to individuals to choose the macroeconomic conditions, particularly the interest rate conditions, under which to purchase annuities, and participate in the proposed phased withdrawal program. For greater flexibility the age of withdrawal of lumpsum, and the purchase on annuity (and phased withdrawal program) could be separated. Thus, a person could withdraw lump-sum at age 60, but purchase the annuity anytime between 60 and 70 years.

- Flexibility in timing of annuity purchases will better enable suppliers of annuities and bonds, such as life insurance companies, to match their assets and liabilities; and help manage uncertainties in longevity trends.

- Third, the current EET treatment of NPS is disadvantageous to its growth compared with other instruments that are subject to EEE treatment. Thus, there is a strong case for exempting from income tax a reasonable proportion of accumulated NPS balances.

As there is already a higher exemption level for senior citizens of Rs 240,000 currently, the two combined should enable even the middle class income earners to be exempt from income tax during old age. Simultaneously, the reported plans to harmonise EET treatment for other pension and provident fund plans in April 2011 should be implemented to minimise tax arbitrage.

The above three parametric reforms in the mandatory and voluntary NPS will further strengthen the NPS design, and contribute to better retirement income security.

They could also help in increasing NPS membership, which, to date, has been very disappointing with around 5,000 members, and meager balances of Rs 100 million.

India’s current elderly population of about 105 million is projected to increase to 330 million by 2050.

India’s demographic challenges arising from rapid ageing, and its need for fiscal consolidation (the current Greek crisis has lent greater urgency to this issue globally), strongly suggests that the PFRDA Bill be considered by the Parliament expeditiously; and parametric reforms of NPS suggested above be given urgent consideration.
Source: DNA India

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Central Government Employees NPS gives 14.82% average returns

Central Government Employees NPS gives 14.82% average returns

Central government employees who joined as a part of the contributory New Pension Scheme (NPS) have earned a weighted average return of 14.82 per cent during 2008-09, the first year when three fund managers managed a corpus of around Rs 2,000 crore.

This has outperformed any another form of Investment like PF etc. Its a Win Win situation for both Govt as well as Employees.

This is in contrast to the annual 8 per cent returns between January 2004 and March 2008 when the government had not transferred the money to the three fund managers – SBI Pension Fund, UTI Retirement Solutions and LIC Pension Fund.

The Centre moved all employees joining from January 1, 2004 to NPS, where they have to chip in with a contribution of 10 per cent of their basic salary with a matching contribution made by the government. While the money was being deducted, it was parked in a government account and earned a fixed rate of return.

While the corpus will increase this year, partly due to higher contribution and also due to the release of some of the arrears following the implementation of the Sixth Pay Commission’s recommendations, the equity investment is also expected to go up.

At present, around 5 per cent of the corpus is invested in equities against the permissible limit of 15 per cent.

This year onwards, the fund management fee is also going to decrease to 0.0009 per cent (or 0.09 basis points), in line with the pension scheme for non-government employees, as against up to 5 basis points last year.

In addition, state governments are expected to join the scheme. While 21 states have shown their willingness to join NPS, none of them have started releasing the funds as some of them, unlike the Centre, are reluctant to bear the costs, such as those related to the record-keeping agency.

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Banks, insurers, Konkan Rly to join new pension scheme

Banks, insurers, Konkan Rly to join new pension scheme

The New Pension System will get a boost with many banks, insurance companies, Konkan Railway and Damodar Valley Corporation slated to put their retirement corpus into the contributory pension scheme.

“Damodar Valley Corporation and Indian Banks Association are coming in. The Konkan Railway has shown interest. Some insurance companies too are likely to join the scheme. There are lots of companies which are showing interest now,” an official with the P ension Fund Regulatory and Development Authority (PFRDA) said.

The Indian Banks Association, according to the official, has said new bank recruits who join from April 2010 will be included in NPS. Besides, insurance companies are looking at similar provisions for their new employees.

“Companies which do not have the EPFO liability can directly come to us. Those who have EPFO liability can make contribution over and above EPFO,” the official said, adding the fund managers would be decided by companies themselves.

There are six fund managers for the citizens’ scheme. These include IDFC Mutual Fund, Kotak Mahindra, SBI, UTI Asset Management, ICICI Prudential Life Insurance and Reliance MF.

Initially, the NPS was launched for the Central government employees joining service from January 1, 2004, but from last May it was extended to all citizens.

According to the information available on the PFRDA Website, as many as 8,78,713 subscribers have joined the NPS till last month, which include 5,532 from the unorganised sector. Out of this, a large majority of 6,09,376 subscribers are the Central gover nment employees, apart from 2,55,903 state government employees.

National Aluminium Company was the first public sector undertaking to move its employees retirement funds to the New Pension System to a contribution of 6 per cent of the basic pay into the NPS.

Source: PTI

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New Pension Scheme (NPS) is set to receive a major boost with the SBI...

NPS gets a chunk of SBI staff’s pension corpus

The Central government sponsored New Pension Scheme (NPS) is set to receive a major boost with the State Bank of India, moving a significant part of its employees’ pension corpus to the scheme. The NPS will also get significant contributions in coming months by way of employer and employee contribution towards the pension of public sector bank employees who join after April 1, 2010.

A senior official at the pension regulator PFRDA said NPS fund managers will henceforth manage a chunk of a fund that helps pay for retirement benefits of all present and former employees of the country’s largest lender.

“We received various queries from SBI regarding the nitty-gritties of our scheme,” said Rani Singh Nair, executive director at PFRDA. “We are happy to report that they have now joined us and we hope many others will also be encouraged to follow the example,” she told ET.

Industry officials say SBI is moving close to Rs 2,000 crore out of its about Rs 25,000-crore employees retirement corpus to NPS. The bank feels that NPS will help the fund fetch better returns than the current system it has in place.

As per published data, in-house fund management of most stateowned banks earned 8-9 % annualised returns in the fiscal year ended March 2009. NPS earned nearly 16%. It is this higher yield that SBI is trying to capture by participating in NPS.

In terms of the agreement between IBA and bank unions, all bank employees joining after April 1 will migrate to a defined contribution scheme. Since several public sector banks are planning to recruit clerks and probationary officers in the coming months, the number of NPS accounts are expected to grow sharply.

SBI’s chunk is a part of an overall corpus that pays for certain retirement benefits of employees, including the defined benefit pension.

Besides SBI, several state-owned corporations such as Nalco and Damodar Valley Corporation (DVC) have transferred a portion of their employees retirement benefit corpus to the NPS to take advantage of the benefits of economies of scale in managing retirement funds.

Unlike employees at state-owned banks, SBI employees are supposed to enjoy a “third benefit” as a part of their superannuation package. While others receive only provident fund (or pension) and gratuity post-retirement, SBI executives additionally get a third pension component.

This is done on a “defined benefit” basis, where the bank promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than as a function of investment returns.
Source: Economic Times

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Govt gives assent to new penion system

Govt gives assent to new penion system

Giving approval to appoint New Pension Systems (NPS) Trust for fund management and other services and the Draft Agreement for signing the New Pension System (NPS) Trust, New Delhi and to adopt the scheme for fund management on the pattern of Government of India a recent state cabinet meeting has pledged to do everything in its power to promote the welfare of the employees of the state.

According a highly placed official source, with a view to introduce pension reform and establishing a solid and sustainable social security arrangement in the country, the Central government notified the Defined Contribution Pension System (New Pension Scheme) for the new entrants to Central government services, except for the Armed Forces, replacing the existing system of Defined Benefit Pension System with effect from January 1, 2004.

The source further mentioned that the matter was tabled in a recent cabinet meeting as an agenda for signing of agreement between the state government and the New Pension System (NPS) Trust, to keep pace with the Central government, as state government also introduced the said New Pension Scheme with effect from January 1, 2005.

Necessary instructions had been issued for recovery of 10% of Pay, Dearness Pay and Dearness Allowances from the monthly salaries of employees appointed on or after January 1, 2005 and for crediting to government account number 8342, other deposit and for debiting the equal share of the state government for Tier-I.

The source said the system is mandatory for all new recruit to the state government service and the existing provision of the Defined Benefit Pension and GPF would not be available to the new recruits.

In addition to the above Tier-I pension account, each individual may also have a voluntary Tier-II withdrawable account at his option.

But, the scheme for voluntary contributions under Tier-II will be made operative during the period of interim arrangement and therefore no recoveries will be made from the salaries of the employees on this account.

The official source further mentioned that as per the agreed guidelines of New Pensions System Trust, an individual can normally exit at the age of 59 or 60 as the case may be. At exit the individual would be mandatorily required to invest 40% of the pesnsion wealth to purchase an annuity (from an IRDA-regulated Life Insurance Company) which will provide for pension for the lifetime of the employees and his/her dependent parents/spouse at the time of retirement. The individual would receive a limp-sum of the remaining pension wealth, which he would be free to utilize in any manner.

Individuals would have the flexibility to leave the pension system prior to age 59 or 60, as the case may be. However, in this case, the mandatory annuitisation would be 80% of the pension wealth.

The guidelines of the trust, further mentioned that, a pension Fund Regulatory Development Authority (PFRDA) has been appointed under executive order of the Ministry of Finance, Government of India pending passing of the PFRDA Bill by the Parliament. PFRDA has signed a contract agreement with the National Security Depository Limited (NSDL) as Central Record keeping agency for administration and customer service for all subscribers of the NPS, issue of unique Permanent Retirement Account Number (PRAN) to each subscriber, maintaining a database of alls Prans issued and recording transactions relating to each subscriber’s PRAN and action as an operational interface between PFRDA and others NPS intermediaries, such as Pension Funds, Annuity Service Providers, Trustee Banks etc.

The official source further mentioned that while tabling the issues before the recent cabinet meeting, it has been mentioned that the CRA system has become operational with effect from June 2, 2008 for Central government employees. The state government of Manipur has already decided to avail the services of the CRA and an agreement has been signed with the NSDL on November 12, 2009 last year.

So far, there are 5,813 new entrants who are appointed under state government on or after January 1, 2005 in 32 departments. Of these recoveries salaries of 5,459 employees have been made but government’s matching share has not been paid by most of the department.

Reconciliation of accounts with those of AG’s figure shall be carried out before the transfer is effected to the trustee Bank. With this elaborate submissions of guidelines of the trust, the recent cabinet meeting has approved to solicit to appoint New Pension System (NPS) Trust for fund management and other services and the Draft Agreement for signing with the New Pension System Trust, New Delhi and adopt the scheme for Fund Management.

Source: Kanglaonline

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Pension funds face quarterly review

Pension funds face quarterly review
Funds under the New Pension Schemes (NPS) managed by SBI Pension Fund — an arm of State Bank of India — has outperformed its rivals for the fiscal gone by, data on the pension regulator’s website revealed. Pension laws mandate that fresh annual allocations to fund managers be made on the basis of their performance in the past year.

Pension Fund Regulatory and Development Authority (PFRDA) has now instituted an independent, quarterly review of the seven pension funds for monitoring their performance and compliance to investment guidelines. Morningstar, a mutual fund data research firm, will be conducting periodic reviews on fund managers, its CEO Aditya Agarwal told ET.

SBI Pension Fund has performed better than its rivals with highest net asset value for both central and state government scheme in 2009-10. For Central government employees schemes, SBI Pension Fund NAV ended March 31 at 12.77, LIC Pension Fund at 12.35 and UTI at 12.33, according to the PFRDA website.

Employee’s Provident Fund Organisation (EPFO) has traditionally provided retirement benefits to government employees. However, civil servants, who were recruited after 2004, are now part of the NPS — a system aimed at encouraging private fund managers. According to estimates, its current corpus stands at around Rs 4,700 crore.

Up for grabs now are their contributions this year — expected to be in the Rs 2,400-crore range. PFRDA allocates fresh accretions every April, depending on the performance of each of the three funds.

In the first year of NPS, PFRDA allocated only Central government employee contributions and last year, it additionally allocated funds to state government pension funds. For state government schemes, SBI Pension Fund’s NAV stood at 10.63, LIC Pension at 10.60 and UTI at 10.59, as per PFRDA data.

Industry officials say the pension fund allocation of Central and state government employees is expected to take place sometime in the second or third week of April. Last year, the allocation was made sometime in May. For 2009-10, PFRDA has allocated 40% to SBI Pension, 31% to UTI Pension and 29% to LIC Pension.

Under NPS, employees have to contribute 10% of their basic salary and dearness allowance, with a matching contribution from their employers. The NPS was thrown open to the unorganised sector last year and private players were also allowed to operate as fund managers. However, the response to NPS from the general public has been modest.

In addition to SBI, LIC and UTI, ICICI Prudential, IDFC, Kotak and Reliance MF also manage pension funds.

Source:Economic Times

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NTPC, DVC likely to join New Pension System

On the heels of the state-owned Nalco joining the New Pension System, the public sector power firms such as NTPC and Damodar Valley Corporation (DVC) have shown interest in moving their retirement funds to the scheme.

"NTPC and DVC have shown interest in joining the New Pension System (NPS). We are holding talks with them," a senior Pension Fund Regulatory and Development Authority (PFRDA) official told PTI today.

The nation's largest power producer NTPC employees around 24,500 while DVC has over 11,000 in its rolls.

Recently, the interim regulator PFRDA wrote to the Department of Public Enterprises to help the Central PSUs bring their employees into the NPS for pension savings beyond the mandatory contributions at 24 per cent of the salary to the Employees Provident Fund Organisation.

"We expect more PSUs to put their retirement funds in the coming days into the NPS," the official added.

Initially, the NPS was launched for Central government employees joining service from January 1, 2004, but from last May it was extended to all citizens.

According to the information available on the PFRDA website, as many as 6,90,274 subscribers have joined the NPS till this January 2, which include 3,119 from the unorganised sector.

Out of this , the maximum 5,64,705 subscribers are the Central Government employees, apart from 1,20,517 state government employees.

The total corpus under these schemes is close to Rs 3,500 crore.
Source: Economic Times

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Additional Relief on death/disability of Government servants covered by NPS

No.1(7)/DCPS(NPS)/2009/TA/336-396

Office of the Controller General of Accounts

Department of Expenditure

Ministry of Finance

7th Floor, Loknayak Bhavan, Khan Market
New Delhi-110 003
Dated: 29.09.2009

CORRIGENDUM

Subject:- Additional Relief on death/disability of Government servants covered by the Defined Contribution Pension System (NPS).

Reference is invited to this office O.M. No.1(7)/DCPS(NPS)/2009/TA/221, dated 02-7-2009 on the above mentioned subject. The existing para no. XXVi of the above OM has been substituted by the following:-

(XXVi): HLTF constituted by the Government has recommended certain benefits that can be provided on death or discharge on invalidation/disability of a Government servant covered under NPS. However, it is likely to take some time before the Rules regulating these benefits under NPS are put into place. However, the CPAO will maintain the data base of the benefits paid to each pensioners/family pensioners as per this OM".

(H.K.SRIVASTAV)
Deputy Controller General of Accounts

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PSU companies line up for New Pension Scheme

The government may have shied away from tabling the Pension Fund Regulatory and Development Authority (PFRDA) Bill in the Winter session, but the New Pension Scheme (NPS) would see its membership base expanding significantly in 2010. Public sector general insurers, who lifted a long-standing hiring freeze in 2009, have agreed to bring their new workforce under the NPS, as has Life Insurance Corporation.

Similarly, following the lead of National Aluminum Company (Nalco) Ltd, another public sector unit, NTPC Ltd, is moving its employees’ superannuation pension funds into the NPS.

“It’s always easier for others to join after one PSU takes the lead. Nalco was the test case and once we finalised the modalities to transfer their superannuation pension funds into the NPS, the template was ready. We expect other public sector firms will also evince interest,” a senior PFRDA official told FE. The interim regulator has also written to the department of public enterprises to help other central PSUs bring their workers into the NPS-fold — for pension savings beyond the mandatory contributions at 24% of salary to the Employees’ Provident Fund Organisation.

While PSUs are looking at the NPS, thanks to a pay revision panel recommendation, the finance ministry has been holding discussions with public sector general insurance companies to join the scheme. The five insurers to be approached are New India Assurance, United India Assurance, National Insurance Company, General Insurance Corporation and Oriental Insurance.

“All five have agreed in principle to join the NPS. We are also discussing the option with LIC,” a finance ministry official said. “At present, only about 300 employees would become members of the NPS. But once the general insurance companies begin recruiting on a larger scale, we expect another 20,000 employees to join,” the official said.

The North Block has also been urging public sector banks to transfer their employee superannuation funds into the NPS, and the Indian Banks’ Association has decided ‘in principle’ to move new workers in public sector banks to the NPS. With PSU banks expected to hire at least 1.5 lakh new workers by 2011, the NPS membership base will rise significantly from its current strength of 6.5 lakh members. PSU and insurance firms aside, several of the 21 state governments that agreed to join the NPS are yet to transfer their workers’ contribution records and funds. Currently, only three states have moved into the NPS fold.

While the scheme was opened up to citizens on a voluntary basis in May 2008, around 3,000 workers have signed up so far. Officials attribute the poor response to the intermediaries’ conflict of interests as they earn better commissions selling other financial products. The high record-keeping costs are also seen to be a deterrent.

Though the PFRDA has decided to call for fresh bids for a second central record-keeping agency to break NSDL’s monopoly, reaching the 1 million members milestone is crucial for the PFRDA as it will reduce record-keeping costs by 20%. NSDL has promised to cut annual maintenance charges from the current Rs 350 to Rs 280 and transaction costs from Rs 10 to Rs 6 per transaction. Source:Financial Express

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Pension regulator hardsells new scheme

The Pension Fund Regulatory Development Authority (PFRDA) is taking ing various measures to increase the number of subscribers under its New Pension Scheme (NPS). It is in discussions with the General Insurance Council, various industry bodies and companies to offer the plan to their employees. Under the recent deal between the Indian Banks’ Association (IBA) and the pension regulator, all new recruits of banks will join the defined contribution system from April 1, 2010. Already 20 nationalised and 12 private sector banks have joined the new system.National Aluminium Co (Nalco) was the first public sector entity to join NPS. While 24 per cent of Nalco employees’ salary will go towards Employees Provident Fund, 6 per cent will be invested in NPS. PFRDA has written to the department of public enterprises to enable all central public sector undertakings (PSUs) to bring their 1.5 million workers into the NPS fold. Sources said BHEL, NTPC and DVC are next in line to join NPS.

Currently, the scheme has 6.7 lakh subscribers, of which close to 3,000 investors are from the unorganised sector. It has Rs 3,500 crore as assets under management from these subscribers, of which the contribution of the unorganised sector is at Rs 5 crore.

The pension regulator may also provide online application facility from next year. “We are trying to make it available on the central record-keeping agency’s website, where investors can log in and make contributions,” said a PFRDA official.

In yet another move, post offices will now be able to sell NPS. Recently the Department of Posts was given recognition as one of the points of presence (PoPs).

PFRDA will soon invite bids from other agencies for record-keeping. Currently, National Securities Depository (NSDL) is the central record-keeping agency and charges Rs 470 per account. Inspite of keeping other charges such as fund management and PoP quite low, the present CRA charges are quite high, a reason why the regulator seeks to bring competition and reduce costs.

SBI Pension Fund, one of the fund managers under NPS posted the highest net asset value (NAV), followed by UTI Retirement Solutions and LIC Pension Fund. PFRDA had asked the pension fund managers to disclose NAVs on a daily basis from December 1 this year. Of the total Rs 3,700 crore corpus under NPS for government employees, SBI PF manages around Rs 1,700 crore. At present, the allocation of funds among the three fund managers is decided by PFRDA.

However, this may change once the PFRDA Bill gets passed in Parliament after which each government employee will have the option of selecting his own pension fund manager.

PFRDA is also launching a small-ticket pension scheme called CRA Lite. The new scheme is mainly aimed at helping self-help groups invest their money in NPS. Under CRA Lite, the minimum annual investment limit would be Rs 2,000, which is lower than the Rs 6,000 per annum for the unorganised sector. The annual record-keeping charges have been brought down to Rs 65-70 for CRA Lite.

It recently introduced a savings account — Tier-II account— where investors can enter and exit at will. The account will be available only to those who have subscribed to Tier-I, which an investor cannot exit till the age of 60.

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Main Features of New Pension Scheme Tier -II Accont

NPS –TIERII Account

The NPS was launched on 1st May 2009 for all citizens on India. The offer document issued at the launch of NPS mentioned that under NPS two types of account would be available to the subscribers viz., Tier-I account-where you contribute your savings for retirement into a non-withdrawable account, and a Tier-II account –a voluntary savings account form which you are free to withdraw your savings whenever you wish.

2. While the Tier I account was made available from May 1, 2009, the facility of Tier II account is being offered form December 1, 2009 to all citizens of India including Government employees mandatorily covered by NPS. The salient features of Tier II account are given in the following paragraphs.

3. Unlike Tier I which is a non-withdrawable pension account with an aim to provide a window of liquidity to NPS subscribers. Both tier I (Pension Account) and Tier II (Savings Account) will be pure retirement savings products, the only distinction being that Tier I is a non withdrawable account while Tier-II is a withdrawable account to meet financial contingencies.

4. The Tier-II would enable the existing Permanent Retirement Account (PRA) holders to build savings through investments over and above those in the Tier I pension account. An active Tier I account will be a prerequisite for opening of a Tier II account.

Key features of Tier II account

• No additional CRA charges will be levied for account opening and annual maintenance in respect of Tier II. However, CRA will charge separately for each transaction in Tier II, the charges being identical to the transaction charge structure in Tier I.

• There will be no limits on number of withdrawals.

• There will be facility for separate nomination and scheme preference in Tier II.

• The subscriber would have the same choice of PFMs and schemes as in the case of Tier I account in the unorganized sector.

• Contributions can be made through any POP/POP-SP.

• There will be facility of one-way transfer of savings form Tier II to Tier I.

• Bank details will be mandatory for opening a Tier II account.

• No separate KYC for Tier II account opening will be required; the only requirement is a pre-existing Tier I account.

Minimum contribution requirements:

1. Minimum contribution at the time of account opening - Rs. 1000/-

2. Minimum amount per contribution - Rs. 250/-

3. Minimum Account Balance at the end of FY - Rs. 2000/-

4. Minimum number of contributions in a year - 4

(Minimum One contribution in case a subscriber joins in the last quarter)

5. Penalty of Rs. 100/- to be levied on the subscriber for not maintaining the minimum Account balance and/or not making the minimum number of contributions.

Charge Structure for PoPs:

1. New account opening charges (Tier 1 & II both) - Rs. 40/-

2. Tier II activation for existing subscribers of Tier I - Rs. 20/-

Comparison between Tier – I and Tier – II Accounts

The following table summarizes the main features of Tier II account vis-à-vis Tier I account of NPS:

S.No.	Functionality	Tier I	Tier II
1	Registration	Registration through PAOs for Government subscribers and through POP-SP for all other subscribers. KYC to be done by POP-SP.	Registration only through POP-SP for Government as well as all other subscribers. PRAN card to act as KYC, no separate documentation required.
2	Contribution	Government Subscriber Mandatory contribution through PAO/CDDO for Government subscribers (10% + 10% of Basic +DA per month) Other Subscribers (all Citizen except those mandatorily covered by NPS) Minimum four contribution in a year Minimum contribution Rs 6000/- p.a. Minimum Contribution Rs 500/- per contribution	Voluntary contribution through POP/POP-SP for Government as well as other subscribers Minimum contribution of Rs 1000/- at the time of account opening Minimum contribution of Rs 250/- per contribution Minimum balance of Rs 2000/- at the end of each financial year
3	Scheme Preference	Unorganized sector subscribers 3 Asset classes and 6 PFMs Availability of Auto Choice Government Subscribers Default Scheme under Tier I 3 PFMs	All subscriber shall have Choice of six PFMs and three assets classes (E,C,G) Availability of Auto Choice
4	Bank Account	Non Mandatory	Mandatory
5	Withdrawals	No Withdrawals allowed during vesting period except as per the norms prescribed by PFRDA	No Limit on Withdrawals

Note: The form for opening of Tier II account is available on website www.npscra.nsdl.co.in

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Performance of Pension Fund Managers - New Pension Scheme

Performance of Pension Fund Managers, managing funds of Government Employees,was reviewed by the New Pension System Trust (NPST). The weighted average return as on 30/09/09, as reported by the Pension Fund Managers (un-audited figures),is as under:- Weighted Average Return as on 30/09/09 (MTM Basis)

Name of Company ------------------Return%

LIC Pension Fund Ltd. ------------10.57 (29%)

SBI Pension Fund Pvt. Ltd. -------13.41 (40%)

UTI Retirement Solution Ltd. -----12.73 (31%)

Weighted Average Return 12.3756%

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New PSU bank staff to get NPS (New Pension Scheme)

All persons who join public sector banks on or after April 1, 2010 would come under the government’s new pension system (NPS).

Public sector banks are set to hire 30,000-40,000 employees in the next two years, with about 35 per cent of the total staff set to retire by 2011.

“All new recruits would come under the NPS, the move would also give a push to the new system,” a senior finance ministry official said on the condition of anonymity.

Despite several incentives that were announced by Finance Minister Pranab Mukherjee in the Union Budget, there have been few takers for the NPS.

Trade unions have opposed the move to bring new employees under the NPS. “We are trying to find a solution,” CH Venkatachalam, general secretary, All India Bank Employees’ Association, told Hindustan Times. “We are holding talks with the government and the bank managements… to ensure that their rights are fully protected.”

The Pension Fund Regulatory and Development Authority Bill needs to be reintroduced in Parliament, as it had lapsed with the dissolution of the Lok Sabha before the general elections.

The government had made it mandatory for all central government employees who joined on or after January 1, 2004 to be brought under the NPS. Several public sector undertakings have also switched to the NPS for their employees.

Government officials say the bill is likely to be taken up in the forthcoming Parliament session, and that even though financial sector reforms are critical, the government would go ahead with them only when there is consensus among all coalition partners.
Source:Hindustan Times

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South Indian Bank largest service provider for New Pension Scheme (NPS)

Thrissur (Kerala) Oct 26 (IANS) Kerala-headquartered South Indian Bank (SIB) has emerged as the largest service provider for the 'New Pension System' (NPS), launched by the central government.

With 134 of its branches authorised to offer the service, SIB became the largest service provider among the 21 banks and financial institutions operating this pension and investment scheme, the bank said Monday.

'This scheme will empower subscribers to plan their retirement and pension. This is a good investment tool,' said V.A. Joseph, managing director and chief executive of the bank.

NPS is a social security scheme open to all employees falling in the age category of 18-55.

The scheme is implemented by the Pension Fund Regulatory and Development Authority (PFRDA).

Last week, Oscar award winner Resul Pookutty launched this service for SIB's NRI customers here.

SIB posted the highest ever quarterly net profit of Rs.60.11 crore in the first quarter this fiscal as against Rs.38.62 crore reported in the like period last year, registering a growth of 55.64 percent.

The bank recently was in the news when it bagged the 10th 'Financial Express' Awards for 'India's Best Banks' in the traditional banks' category.
Source:IANS

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Questions & Answers: Related to the New Pension Scheme (NPS)

Clarifications:-

1. Whether a retiring Government servant is entitled for leave encashment after retirement under the NPS?

The benefit of encashment of leave salary is not a part of the retirement benefits admissible under Central Civil Services (Pension) Rules, 1972. It is payable in terms of CCS (Leave) Rules which will continue to be applicable to the government servants who join the government service on after 1-1-2004. Therefore, the benefit of encashment of leave salary payable to the governments/to their families on account of retirement/death will be admissible.

2. Why is it mandatory to use 40% of pension wealth to purchase the annuity at the time of the exit (i.e. after the age of 60 years) from NPS?

This provision has been made in the New Pension Scheme with an intention that the retired government servants should get regular monthly income during their retired life.

3. Whether any minimum age or minimum service is required to quit from Tier-I?

Exit from Tier-I can only take place when an individual leaves Government service.

4. Whether Dearness Pay is counted as basic pay for recovery of 10% for Tier-I?

As per the New Pension Scheme, the total Dearness Allowance is to be taken into account for working out the contributions to Tier-I. Subsequently, a part of the “Dearness Allowance” has been treated as Dearness Pay. Therefore, this should also be reckoned for the purpose of contributions.

5. Whether contribution towards Tier-I from arrears of DA is to be deducted?

Yes. Since the contribution is to be worked out at 10% of (Pay + DP + DA), it needs to be revised whenever there is any change in these elements

6. Who will calculate the interest PAO or Central Pension Accounting office(CPAO)?

The PAO should calculate the interest.

7. What happens if an employee gets transferred during the month? Which office will make deduction of Contribution?

As in the case of other recoveries, the recovery of contributions towards New Pension Scheme for the full month(both individual and government) will be made by the office who will draw salary for the maximum period.

8. Whether NPA payable to medical officers will count towards ‘Pay’ for the purpose of working out contributions to NPS?

Yes. Ministry of Health & Family Welfare has clarified vide their O.M. no. A45012/11/97-CHS.V dated 7-4-98 that the Non-Practising Allowance shall countas ‘pay’ for all service benefits. Therefore, this will be taken into account for working out the contribution towards the New Pension Scheme.

9. Whether a government servant who was already in service prior to 1.1.2004, if appointed in a different post under the Government of India, will be governed by the CCS (Pension) Rules or NPS?

In cases where Government servants apply for posts in the same or other departments and on selection they are asked to render technical resignation, the past services are counted towards pension under CCS (Pension) Rules, 1972. Since the Government servant had originally joined government service prior to 1-1-2004, he should be covered under the CCS (Pension) Rules, 1972.

10.Procedure for allotment of Permanent Retirement Account Number (PRAN):-

Immediately on joining Govt. service, the Govt. servant will be required to provide particulars such as his name, designation, scale of pay, date of birth, nominee(s) for the fund, relationship of the nominee etc. in the prescribed for (Annexure I).

The DDO concerned will be responsible for obtaining this information from all Govt. servants covered under the New Pension Scheme.

The PAO concerned will allot a unique 16 digit Permanent Retirement Account Number (PRAN). The first four digits of this number will indicate the calendar year of joining Govt. service, the next digit indicates whether it is a Civil or a Non-civil Ministry, the next six digits would represent the PAO Code (which is used for the purpose of compiling monthly accounts), the last five digits will be the running serial number of the individual govt.

servant which will be allotted by the PAO concerned. PAO will allot the serial number pertaining to individual Govt. servants from 00001 running from January to December of a calendar year. A register will be maintained for allotment of PRAN to ensure that PRAN are allotted in sequence and there is no duplication of PRAN.

For the flow of information from Non Civil Ministries/Departments to the CPAO, each of them will nominate a Nodal Office, which will be responsible for forwarding the consolidated information/particulars in respect of their Ministry/Departments and for correspondence with CPAO.

The particulars of the Govt. servants received from the various DDOs will be consolidated by the Nodal Office identified in each Ministry/Department/Office and sent to the CPAO. The CPAO will keep this information in their computer database.

The accounting heads involved in the operation of the new pension scheme will be intimated in due course.

The first salary bill of the new entrant will be passed after ensuring that the Annexure-I is received.

Tier1 amount equal to 10% of the (basic+da+npa) will be deducted from the payBill and a matching contribution will also be credited to the individuals credit.

Separate paybill should be prepared for the individuals who are covered under this scheme. The schedule information is to be captured in the Annexure-II, which should be carefully checked. The data file of annexure-I and annexure-II will be created and forwarded to CPAO on monthly basis. CPAO on receipt of this information will update its database and generate exception reports for missing credits, mismatches etc.

No withdrawal of any amount will be allowed during the interim arrangements.

At the end of each financial year the CPAO will prepare annual accounts statements for each employee showing opening balance, details of monthly deduction and Govt.’s matching contribution, interest earned, if any, and the closing balance. CPAO will send these statements to Nodal Office concerned.

After the close of each financial year, CPAO will have to report the details of the balances (PAO-wise) to each PAO for the purpose of reconciliation. The PAO will reconcile the figures of contributions with figures as per the books of CPAO.

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New Pension Scheme Unacceptable: Communist Party of India (Marxist)

New Pension Scheme Unacceptable

Below we reproduce the full text of the speech made by Dr Asim K Dasgupta, minister for finance and excise, government of West Bengal, at the conference with chief ministers and state finance ministers on ‘Issues related to Pension’:

WE appreciate the convening of this conference of chief ministers and state finance ministers on issues related to the New Pension Scheme and the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2005. It gives us an opportunity to express our views on a specially important aspect of social security in terms of pension for the government employees as well as other sections of working population of our country.

TWO PENSION SYSTEMS

For the government employees and others, such as teachers, employees of public undertakings, there has evolved over the years a social security scheme in terms of a defined benefit pension system. In this pension system, defined benefit in terms of 50 per cent of last salary (or average of last ten months’ salaries) drawn, commuted value of pension, gratuity, Dearness Relief etc. is ensured by the government. In West Bengal, the defined benefit pension system covers not only all state government employees, but also includes employees of state public undertakings, teachers and non-teaching staff of all state government-aided educational institutions from the primary to the university level as well as employees of the municipalities and the panchayats.

As against the, defined benefit pension system, a New Pension System (NPS) has been introduced by the government of India from January 1, 2004 for new entrants to services in the central government (other than the Armed Forces). This NPS means a shift from the defined benefit pension system to a defined contributory pension system. The new system works on defined contribution basis and has two tiers - Tier I and II. Contribution to Tier I is mandatory for all government employees (joining services from January 1, 2004), whereas contribution to Tier II is optional and at the discretion of the employees. In Tier I, the government employees have to make a contribution of 10 per cent of the basic pay plus dearness allowance which will be deducted from the salary bills. The government also has to make a matching contribution. Tier I contributions (and investment returns) are kept in a non-withdrawable Pension Tier I Account. Tier II contributions are kept in a separate account which is withdrawable at the option of the employee. In order to implement the scheme, there would be a Central Record Keeping Agency and several Pension Fund Managers to offer to the government employees, in the initial formulation, three categories of schemes A, B and C based on the proportion of investment in fixed income instruments and equities.

In order to give the NPS a statutory basis and to put in place a regulator with statutory powers, the union government introduced the Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2005 and after obtaining the recommendations of the Standing Committee on Finance has now proposed an amendment to the Bill to (a) make available to subscribers a further option – ‘D’ of 100 per cent investment of their fund in government securities, (b) provide that at least one of the pension fund managers’ be a government company or owned by a government company or companies, and ( c) prohibit investment of fund of subscribers overseas.

It is important to note that on the issue of providing a government guarantee of the retirement benefit, the New Pension System states [in Clause 20(f) of the Bill] that “there shall not be any implicit or explicit assurance of benefits except market based guarantee mechanism to be purchased by the subscriber.”

Despite this critical absence of assurance of benefits in this new scheme, the Defined Contribution Pension System is sought to be introduced in place of the Defined Benefit Pension Scheme on the basis of three arguments: (a) financial unsustainability of the Defined Benefit Pension System, (b) lack of choice of schemes and fund managers in this pension system and (c) inadequate coverage beyond the employees and workers in the organised sector.

We present our views on each of three important points mentioned above, as well as loss and gain of the government and the employees from New Pension System.

FINANCIAL SUSTAINABILITY OF THE DEFINED BENEFIT PENSION SYSTEM

The union finance ministry has made an estimate of rise in pension expenditure and increase in the ratio of pension expenditure to tax revenue taking the entire period 1993-94 to 2004-05 as a whole, and indicated a compound growth rate of pension expenditure of around 21 per cent for the central government and 27 per cent for the states, and an increase in the ratio of pension expenditure to tax revenue from 9.7 per cent to 12.6 per cent for the central government and from 5.4 per cent to more than 10 per cent for the states in 2004-05. On the basis of trend rate of pension expenditure and tax revenue over this period (1993-94 to 2004-05) as a whole, the projection has been made for financial unsustainability in terms of rise in pension-tax revenue ratio.

If, however, instead of taking the data for the entire period from 1993-94 to 2004-05 as a whole, the relevant data are carefully noted for the recent years, then a different picture emerges. In recent years, after introduction of the Value Added Tax in the states, growth rate of tax revenue of the states has increased significantly –– from a historic rate of growth of 12 per cent of sales tax revenue to more than 20 per cent growth rate of VAT revenue. Moreover, rate of growth of pension has also started falling in recent years. For West Bengal, for instance, during the last three financial years, growth in pension expenditure has been generally below 10 per cent.

On the basis of large sample data, and using standard actuarial techniques and LIC life expectancy figures, we have made a projection of likely behaviour of the ratio of pension expenditure to tax revenue for the state of West Bengal. Even if an allowance is made for increase in pension expenditure after accommodating possible recommendations of Pay Commission, in a balanced manner in terms of a 15 per cent annual increase in pension bill (in place of about 10 per cent annual increase now), and the tax revenue is projected to grow at 18 per cent, then the ratio of pension expenditure to tax revenue will, in fact, steadily fall to 9.6 per cent in 30 years, i.e., in 2037. If the tax revenue is projected to grow at 20 per cent, then the pension-tax revenue ratio will steadily fall further to 5.7 per cent. In other words, on the basis of careful assumptions and appropriate steps on pension expenditure and tax revenue growth, financial sustainability of the Defined Benefit Pension System can indeed be ensured.

LOSS AND GAIN OF THE GOVERNMENT FROM THE NEW PENSION SCHEME

The state government has also worked out the estimated expenditure for payment of government’s contribution under the new pension scheme. It has been estimated on the basis of 100 per cent replacement rate that the state government’s expenditure on this account will be Rs 33 crore in the first year and will increase to Rs 2,495 crore in 22 years, in addition to the expenditure on account of existing pension scheme. These requirements will go on increasing for 33 years, assuming that the newly employed recruits will render 33 years of service before retirement. Therefore, for about 33 years, after the introduction of the new pension scheme, the total pension expenditure of the state government will keep on increasing at a very high rate. It is only after 33 years that the effect of the new pension scheme can be felt. The contribution under the New Pension Scheme will then become more or less steady except for inflation-related increases and the pension expenditure under the existing scheme will come down as there will be no net addition to the number of pensioners covered by the existing scheme.

There can be net saving under the New Pension Scheme only when the reduction in expenditure in relation to the projected expenditure under existing scheme is more than the contribution to be paid by the government. This can only happen some time after 33 years. There is, therefore, no gain to the government at least in a time horizon of about 33 years. In fact, during this period, the government will have to bear substantial, additional burden.

LOSS FOR EMPLOYEE FROM THE NPS

Now let us look at the new pension scheme from the point of view of the employees. There will clearly be a cut in the wages of employee to the extent of 10 per cent of pay including dearness allowance throughout his service. This is a loss to the employee in terms of wages. Let us see what happens to his pension. Let us take the case of a Group D employee who is recruited in the year 2007. We assume that the employee will retire in 2040 after rendering 33 years of service. As per existing scheme of the government, he will get movement to the first, second and third higher scales after 8, 16 and 25 years of service. Thus, if the employee does not get any promotion, his pay including dearness allowance will increase from Rs 4,446 per month to Rs 8,943 per month at the end of 33 years. We are not considering the effect of inflation on salary. At 2006-07 price, the employee would be entitled to the following retirement benefits under the existing scheme: -

i) Pension including pension - Rs 4,472 per month relief, before commutation (In West Bengal, at the rate of 50 per cent of last salary drawn)

ii) Gratuity - Rs 1,46,702

Let us assume that an employee contributes 10 per cent of his pay including dearness. allowance every month and the government makes an equal contribution. We also assume that the deposit earns a real rate of interest of 2 per cent per annum, with nominal rate of interest being appropriately higher depending on the rate of inflation. Now, if from the amount accumulated at the end of 33 years, the gratuity (to which he is entitled as per existing pension scheme) is paid off and the balance is converted into an annuity with survivor benefits, the employee would get an amount of Rs 3,600 per month, which is about 80 per cent of the pension he would have got under the existing scheme. In other words, the employee will lose 20 per cent of his existing retirement benefits if he comes under the new pension scheme. Moreover, the annuities are generally not inflation-indexed and therefore, the annuity will remain fixed throughout his life and the life of the survivor. This means that with increase in the cost of living index, the pension will fall further, unlike in the case of existing scheme in which an employee gets 100 per cent neutralisation for increase in the cost of living index through dearness relief. Thus, there is a serious loss to the employee in so far as his retirement benefits are concerned in addition to the loss that. He has suffered through effective wage-reduction during his service.
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