In the Budget 2003-04 a new pension system has been announced based on defined contribution, shared equally in the case of Government employees between the Government and the employees. Under the scheme there will be no contribution from the Government in respect of individuals who are not Government employees. The new pension scheme will be portable, allowing transfer of the benefits in case of change of employment, and will go into ‘individual pension accounts’ with Pension Funds.2) The Ministry of Finance will oversee and supervise the Pension Funds through a new and independent Pension Fund Regulatory and Development Authority. The existing scheme of pension, GPF and Gratuity would cease for new entrants to the Central civil services. The following are the details in respect of the new Scheme: The Government approved on 23 August 2003 the proposal to implement the budget announcement of 2003-04 relating to introducing a new restructured defined contribution pension system for new entrants to Central Government service, except to Armed Forces, in the first stage, replacing the existing system of defined benefit pension system. The new system will also be available, on a voluntary basis, to all persons including self employed professionals and others in the unorganized sector. However, mandatory programmes under the Employee Provident Fund Organization (EPFO) and other special provident funds would continue to operate as per the existing system under the Employee Provident Fund and Miscellaneous Provisions Act, 1952 and other special Acts governing these funds. The main features of the new pension system are given below:
The new pension system would be based on defined contributions, which will use the existing network of bank branches and post offices etc. to collect contributions and interact with participants allowing transfer of the benefits in case of change of employment and offer a basket of pension choices.
The system would be mandatory for new recruits to the central Government service except the armed forces and 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 investment returns would be deposited in a non-withdraw able pension tier-I 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 may also have a Voluntary tier-II withdraw able account at his option. This option is given as GPF is proposed to be withdrawn for new recruits in Central Government service. Government will make no contribution into this account. These assets would be managed through exactly the above procedures. However, he would be free to withdraw part or the entire second tier’ of his money anytime. This withdraw able account does not constitute pension investment, and would attract no special tax treatment.
Individuals can normally exit at or after age 60 years for tier –I of the pension system. At exit the individual would be mandatorily required to invest 40 percent of pension wealth to purchase an annuity (from an IRDA-regulated life insurance company). 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 he 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.Architecture of the New Pension System
It will have a central record keeping and accounting (CRA) infrastructure, several pension fund managers (PFMs) to offer three categories of schemes viz. option A, B and C.
The participating entities (PFMs and CRA) would give out easily understood information about past performance, so that the individual would able to make informed choices about which scheme to choose.Regulatory Authority
An independent pension fund regulatory and development authority (PFRDA) will regulate and develop the pension market. PFRDA will develop its own funding stream based on user charges.
Till such time when a statutory PFRDA is established, an interim PFRDA, on the pattern of SEBI and IRDA, should be appointed by an executive order.
The interim PFRDA is to be headed by a Chairman with a status of not less than a Secretary to the Government of India and would be appointed by the Central Government. Other members of the interim body, not exceeding four in number, of whom not more than two shall serve full time, shall be selected by the Central Government from amongst persons having experience and knowledge in economics, finance, legal and administrative matters with one person from each discipline.Investment strategy
There will be different investment choices such as option A, B and C. The option A would imply predominant investment in fixed income instruments and some investment in equity. Option B will imply grater investment in equity. Option C will imply almost equal investment in fixed income and equity.
Pension fund managers would be free to make investment in international markets subject to regulatory restrictions and oversight in this regard.
It is proposed to evaluate market mechanisms (without any contingent liability) through which certain investment protection guarantees can be offered for the different schemes.Tax treatment
Pension contributions and accumulation would be accorded tax preference up to a certain limit, but benefits would be taxed as normal incomeStatus of implementation: A Resolution was issued on 10 October 2003 to operationalise the decision of the Government to introduce a new pension system on defined contribution basis. An interim pension Fund Regulatory and Development Authority (PFRDA) has, accordingly, been constituted. 2. The interim PFRDA is to be headed by a Chairman and would be appointed by the Central Government. Other members of the interim body, not exceeding four in number, of whom not more than two shall serve full time, shall also be appointed by the Central Government. 3. The PFRDA shall –
Deal with all matters relating to promotion and orderly growth of pension market;
Propose comprehensive legislation for the purpose indicated above; and
Carry out such other functions as may be delegated to the Authority for the purposes indicated in (a) and (b) above.
The PFRDA shall be free to determine its own procedures and will have powers to call for records, returns, notes, memoranda, data or any other material relevant to its working from official and non-official bodies and also hold discussions with them.4. The PFRDA will have its headquarter in New Delhi and submit periodical reports to Government on various aspects of the pension sector and on such other specific matters as may be called for by the Government from time to time. 5. A Notification was issued on 22 December 2003 outlining the major features of the new pension system, which is effective from 1January 2004.