Updated on 20-03-09 : PFRDA (Pension Fund Regulatory and Development Authority) as per its release dated 19.03.09 has taken a decision to defer the date of extension of NPS (New Pension Scheme) to General Public. Check this article for details
As a first step to pension reforms, Government moved to defined contribution based pension system from defined benefit pension system with effect from 1st Jan 2004. As you may aware, New Pension Scheme (NPS) is mandatory for all Central Government employees (except armed forces) who joined in service on after 1st January, 2004. In the second major step with a view to make money work, the pension contributions of covered by NPS are being invested by professional Pension Fund Managers in line with investment guidelines of Government applicable to non-Government Provident Funds from 1st April, 2008.
Now, NPS is getting a new dimension as it is open for public from April 1 2009. As per PFRDA’s (The Pension Fund Regulatory Development Authority of India) latest announcement, any individual including the Government employees who were not covered by NPS earlier will be able to start a New Pension account and start saving up for a pension.
As of now, NPS is awaiting constitutional approval as PFRDA Bill, 2005 is yet to be passed in Parliament. However, Government through its executive orders has made all interim arrangements to set the ball rolling.
PFRDA has already given its approval to the six fund managers — UTI Retirement Solutions, SBI, ICICI Prudential Life Insurance, Reliance Capital, IDFC AMC and Kotak Mahindra AMC — that will manage pension money of private and unorganized sector for the New Pension System (NPS).
The fund managers will run different plans that comprise of equity, government securities and corporate bonds. These plans will obviously have different combinations of risk and potential returns.
Salient features of NPS :
It is truly long term : Investors can plan their retirement with investments in the new Pension Fund. That’s a clear 30-40 year time horizon for new entrants.
It is well structured : PFRDA has appointed 6 Pension Fund Managers (PFM), a Central Recordkeeping Agency (National Security Depository Limited) and Points of Presence (PoP – basically distributors). The CRA acts as the interface between PoPs, PFMs, Banks etc.
It is extremely low cost : Pension Fund Managers have been appointed at the lowest cost (less than 0.010% per annum as management fee). This is MUCH LESS than what Mutual Funds charge for managing even liquid funds and a small fraction of what insurance companies charge. NSDL, the CRA for the NPS, would charge Rs. 280 as annual maintenance fee per subscriber and Rs. 6 for every transaction.
It offers choice: Investors can choose from Equity Biased (E), G-Sec Biased (G) and Corporate Debt/Fixed Income biased (C) models. Investors can also indicate a mix amongst all three. Equity Investments are restricted only to the NIFTY 50 index. This Passive Investment policy makes sense, as this represents an adequately diversified portfolio and also keeps cost of fund management low.
It offers mobility: Investors can change their PFM of choice, by indicating the same to the CRA. With the CRA issuing all subscribers a unique PRAN (Permanent Retirement Account Number), hopefully this number would make all record-keeping easy. Issue of PRAN will ensure portability across geographies as well as jobs.
It offers convenience: With several PoP (basically PSU Banks), reach is not a problem. And with NSDL taking care of the back-end, there would be no opaqueness that the present EPFO is notorious for.
It offers transparency : While there is not much information about disclosures and reports, there is hope that there will be portfolio disclosures, toll-free numbers (for customer service) and updated account statements after every transaction.
This Defined Contribution model is all set to revolutionize the Pension planning scenario. If successful, then this would be as pioneering as the introduction of mutual funds or the entry of the private sector into insurance.
As per the present regulations the gains in NPS will be treated as taxable. This is one of the disadvantages of the NPS in its take-off itself. An enthusiastic investor would expect that his gains in NPS is tax free.
Check PFRDA website for the list of fund managers, POP (distributor banks) and other legislations