New Pension Scheme

NEW PENSION SCHEME – HOW DOES IT COMPARE WITH THE OLD ONE?

Important Features	Old Pension Scheme	New Pension Scheme	Intricacies and Implications
Employee’s Contribution	On the aggregate of Basic Pay, Special Pay and other allowances ranking for P.F, 10% has to be contributed by the employee.  This will be kept in the Individual’s P.F. account.	On the aggregate of Basic Pay, Special Pay and other allowances ranking for P.F. and also Dearness Allowance, 10% has to be contributed by the employee.	There will no longer be any P.F. account. The take home pay of the employee will get reduced, because of the additional amount deducted (10% on D.A.).
Bank’s Contribution	Bank will contribute an equal amount, matching the employee’s contribution.  This will be kept in another account separately and balances in this account will become the corpus fund to service the future pension of the employee.  But, most of the banks state this amount alone is not sufficient to service the pensions.  There is a huge uncovered deficit .	Bank will contribute an equal amount, matching the employee’s contribution.  Both employee’s contribution and the bank’s contribution will be clubbed and kept in a single account.  Balances in this account will be invested in pension funds.	Because of higher contribution by the bank, the Pension Corpus Fund will be much larger.
Additional Contribution from the employee	Employees can voluntarily contribute an additional amount that is equal to the compulsory P.F.   Employees have the freedom to stop VPF contribution, as and when they want, by giving 1 month notice.	Tier II account is a voluntary saving facility, wherein the subscriber is permitted to save any additional amount.  Withdrawals from Tier II Account are allowed, as per the subscriber's choice.	From Tier II account, unlimited number of withdrawals are permitted, with the only condition that a minimum balance of Rs 2000 is maintained at the end of the Financial Year (i.e. as on 31st March).
Where the funds will be invested?	(a) 40% of the PF funds will be invested in Government securities and Government guaranteed securities.  (b) Another 30% will be invested in Bonds and Securities of Public Financial Institutions which include public sector banks and Short Term Deposits of public sector banks.  (c) The remaining 30% of the funds may be invested in any of the above-mentioned securities.  (d) Notwithstanding the above, up to 10% of the total funds may be invested in private sector bonds/securities, which have an investment grade rating from at least two credit rating agencies. Banks do not have total transparency nor consistency with regard to their investment policies and decisions made, insofar as the P.F. funds, as of now.  As regards investments made out of Bank’s contribution, nothing is known.	Each of the PFMs will invest the funds in the proportion of 85% in fixed income instruments and 15% in equity and equity linked mutual funds. There are 3 types of funds in which subscribers can invest.   They are 1. Asset Class ‘E’ – Equity Market instruments 2. Asset Class ‘G’ – Government Securities 3.  Asset Class ‘C’ – Credit Risk bearing Fixed Income instruments. A subscriber has got a choice to switch between schemes and change the fund manager too, if his performance is not satisfactory.	Since the funds are invested in bonds and securities, their prices and their earning potential have high degree of volatility. Fixed income securities are also not free from market risks, one must remember. Though it is claimed that professional fund managers will take decisions with regard to investment of the funds, ordinary subscribers do not have sufficient time and requisite knowledge to understand such investment decisions and question the fund managers.  How far the assured 100% transparency in the functions of the pension fund manager will be maintained is also a moot question.

Important Features	Old Pension Scheme	New Pension Scheme	Intricacies and Implications
Who will Manage the Funds?	At present, a P.F. Trust comprising of members drawn from the management, award staff union and officers’ union manage the funds.  They meet at fixed intervals and take decisions with regard to investments, roll over/extension, withdrawal, loans and final payment on VRS/CRS/ Superannuation.	ICICI Prudential Pension Funds Management Company Ltd, IDFC Pension Fund Management Company Ltd, Kotak Mahindra Pension Fund Ltd, Reliance Capital Pension Fund Ltd, SBI Pension Funds Private Limited and UTI Retirement Solutions Ltd are the 6 fund managers approved by PFRDA.	It is difficult to forecast the efficiency in the performance of the fund managers.  Having only 6 fund managers makes it a risky proposition.  If we take into account the working population of India, this number is very less.   As the number of subscribers increases, hopefully the government will allow more players in this filed.
Regulatory Agency	As of now, there is no separate agency at the national level for overseeing P.F. funds.  Multiple agencies like Regional Provident Fund Commissioners, Company Law Board (in case of companies) and Ministry of Labour are overseeing the administration of PF funds. The courts having jurisdiction will hear all the cases and disputes, as per the provisions contained in The Provident Funds Act, 1925.	Pension Fund Regulatory and Development Authority (PFRDA) is the regulatory body.  PFRDA was established by Government of India on 23rd August, 2003.  The government has through an executive order dated 10th October, 2003 mandated PFRDA to act as a regulator for the pension sector.  The mandate of PFRDA is development and regulation of pension sector in India. NSDL e-Governance Infrastructure Limited and PFRDA have entered into an agreement relating to the setting up of a Central Recordkeeping Agency (CRA) for the National Pension System (NPS).	The extent of autonomy enjoyed by PFRDA is yet to be tested.  In case of default or malpractices noticed, whether PFRDA has necessary punitive powers and if so, to what extent they are effective are yet to be known.
Fees/Charges deducted	There are no charges deducted.  Even the administrative expenses like postage, stationery, telephones, electricity and rent are absorbed by the bank.  As there is no full time member for the P.F. trust, no salaries are paid to them.   This way, no additional cost is passed on to the subscriber.	Following costs are to be borne by the Subscribers at the time of registration and/or performing any transaction. The contribution will be remitted, net of bank charges. Fixed cost: One-time account opening cost and issuance of PRAN – Rs.50 Initial subscriber registration and contribution upload – Rs.40 Annual maintenance charges – Rs.225 Variable cost: PoPs can now charge Rs 100 plus 0.25 per cent of the investment, as against a flat fee of Rs 20 earlier. Annual custodian charge - 0.0075-0.05 per cent of the fund value Annual fund management charge - 0.0102 per cent of the fund value	NPS is touted as the lowest cost pension scheme. Other handling and administrative charges are also claimed to be the lowest. There are no entry and exit loads. But, it remains to be seen how the actual costs move in the future.   With inflation, the costs may go up further.  When more pension fund managers enter the fray and the subscriber base also expands vastly, the charges may also come down in future. Whatever be the charges, they result in diminution of the pension wealth.

Important Features	Old Pension Scheme	New Pension Scheme	Intricacies and Implications
Anticipated Returns from the investments	There is no minimum assured return.  Many banks offer less than the maximum interest rate paid on Term Deposits of staff members. Quite often, the interest paid on P.F. in banks is lower than the interest paid by EPO of the central government. However, positive returns are assured and there is no way that the principal gets eroded.  As on date, interest at 8.5% p.a. is being paid on the subscription made by the employee and the employer, in most of the banks.	There is no minimum guaranteed return in NPS. Depending on the performance of the various pension funds in the years to come, the appreciation in the fund value will vary and it cannot be forecast right now.	Since the returns are market determined, the risks associated cannot be avoided.  NPS has delivered 5 to 12 per cent annual returns in the past three years. Due to the market downturn, the return from the equity portfolio has been the lowest (around 5 per cent), while the Asset Class C has returned up to 12 per cent a year. However, we shall not forget the fact that even in developed economies, NAV of several pension funds has come down below par value, resulting in huge loss to the subscribers, either due economic depression or mismanagement of the pension funds.
Loans	Loans may be availed for various purposes, within the limit fixed for each purpose, as per the guidelines fixed by individual banks.	Loan facility is not available.	Even in emergency situations, an employee cannot borrow against his own contribution.
Withdrawals while in service	Non-refundable withdrawals from individual contributions are permitted for purposes like -           (a) purchase of vacant plot and construction of a house thereon (b) outright purchase of a house/flat (c) marriage of children and (d) medical expenses in connection with treatment of major ailments subject to certain conditions on limits, length of service etc.	At any point of time, before 60 years of age, 80% of the pension wealth is to be invested in a life annuity scheme from any IRDA regulated life insurance company namely, Life Insurance Corporation of India (LIC), SBI Life Insurance, ICICI Prudential Life Insurance, Bajaj Allianz Life Insurance, Star Union Dai-ichi and Reliance Life Insurance. The remaining 20% of the pension wealth may be withdrawn as lump sum.   On the amount withdrawn too, tax has to be paid.	This negative clause acts as a dampener to those who want to take VRS before attaining 60 years.  It takes away the freedom of choices available to the subscribers. Since the NPS is meant for retirement and financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds.
Withdrawals after retirement	The individual’s contribution, along with accumulated interest, will be paid back to the employee.  The employer’s contribution along with the interest thereon will be utilised to build up the corpus for payment of monthly pension to the employee for the rest of his life.	Between 60 and 70 years, not less than 40% of the pension wealth is to be invested in annuity and the balance can be withdrawn in instalments or as a lump sum by the employee. In case of phased withdrawal, minimum of 10% of the pension wealth should be withdrawn every year. On attaining the age of 70 years, the amount lying to the credit of the subscriber should be compulsorily withdrawn in lump sum.	After attaining 60 years too, one does not have the freedom to withdraw his own contribution i.e. up to 50% of the pension wealth.  Thus, much of the lifetime savings of the employee gets locked up in annuity, much against his wish.  It is a major setback to the senior citizens and it is a great injustice.  Pensioners aged between 60 and 70 years are the worst affected.

Important Features	Old Pension Scheme	New Pension Scheme	Intricacies and Implications
Payment on the death of the subscriber, before retirement	If the subscriber dies before retirement, his individual contribution to P.F. with the accrued interest is paid to the nominee.  Bank’s contribution is retained to service Family Pension.	In the unfortunate event of the death of the subscriber, option will be available to the nominee to either receive 100% of the pension wealth in lump sum or to continue with the NPS in his individual capacity, after complying with the KYC norms.	Most of the legal heirs of the deceased employee will be compelled to accept the lump sum only, as they do not derive any extra benefit by continuing in the scheme.
Payment on the death of the subscriber, after retirement	If the pensioner dies after retirement, the spouse receives family pension at reduced rates as discussed above.  In case of dependent son/daughter, family pension is payable to him/her till he/she attains the age of 25 years or starts earning Rs.2,550 per month whichever occurs earlier.	Same as above.	Same as above.
Amount of Pension paid	The pension payable is linked to the average pay drawn during the last 10 months of service. Besides, D.A. is also paid on the Basic Pension, even after commutation.  These rates are decided at the time of each wage revision settlement.	The value of the annuity purchased at the time of retirement will determine the amount of monthly pension.  Monthly pension under NPS is a fixed amount and it will attract any D.A. and therefore, in case of rise in AICPI, no additional benefit will accrue to the pensioner.	Over a period of time, the value of pension amount will diminish in real terms, due to inflation.  Therefore, pension received under NPS is not at all beneficial to the pensioner during his life time, as compared to the pension under the old scheme.
Family Pension	Besides, the spouse of the deceased is paid family pension at a reduced rate (which ranges from 15% to 30% of the Basic pension payable).	No family pension is paid, after the death of the subscriber/pensioner.  Only the pension wealth in lump sum is paid.	The dependents of the pensioner do not receive any family pension which attracts D.A.  It may please be noted that D.A. also stands revised periodically, whenever there is a rise in consumer price index.
Income Tax Benefits	For Individual Employees contributing to the NPS, their investment is eligible for deduction from Income under Section 80-CCD(1) of the Income Tax Act, 1961. However, the aggregate of all investments under Section 80-C and the premium on pension products on Section 80CCC should not exceed Rs.1 lakh per assessment year to claim for the deduction.	Under Section 80-CCD(2) of Income Tax Act, if an employer contributes 10% of the salary (basic salary plus dearness allowance) to the NPS account of the employee, that amount gets tax exemption of up to Rs 1 lakh.     However, this is within the overall limit of Rs.1 lakh for all eligible investments put together under Sec.80-C.	Though the employer also gets tax benefit under Section 36 I (IV) A for his contribution, it hardly makes any difference for the employees.  Moreover, for an employee who has already exhausted his full limit of Rs.1 Lakh for investments under Sec.80-C, contributions made to NPS under Sec.80-CCD(1) do not confer any extra benefit.
Income tax liability	No tax is deducted on loans, partial withdrawals (non-refundable) while in service and total withdrawal after retirement.	On retirement, 60% of the savings may be withdrawn in cash and it is taxable.  The remaining 40% will have to be invested in a Pension/Annuity Fund and it is tax free (at the time of investment).	At the time of withdrawal, the lump sum would be taxable as per the individual’s tax slab. It is a case of EET (exempt on contributions made, exempt on accumulation, taxed on maturity) unlike EPF, PPF which are EEE (exempt, exempt, exempt).   Hence, the tax liability will be huge at the time of withdrawing the funds.

Important Features	Old Pension Scheme	New Pension Scheme	Intricacies and Implications
Simplicity of procedures	The existing procedures are very simple, easy to understand and easy to follow.  The employer does most of the jobs for the employees.	Since all the transactions are done online, they can be easily tracked.  But, the burden of tracking one’s investments falls on the subscriber.	Since the systems and procedures are complex, employees will face difficulties and inconvenience throughout their life.  It is difficult to evaluate and choose the fund manager and also the scheme to invest.  Moreover, people cannot take right decisions with regard to switching from one fund to another, even though such facility is available.

Why NPS is not popular?

Main reason =  Low Commission

1. Because NPS offers very low Commission to Fund managers (ICICI, SBI, UTI etc.)
2. So those players (ICICI, SBI) rather prefer to market their own pension, insurance, retirement plans rather than promoting NPS among their (regular) bank customers.
3. Same goes for financial advisor, insurance agents etc. They get more Commission by promoting pension/insurance/retirement plans of private companies to their clients, compared to NPS.

Why NPS does not compare favourably with old Pension Scheme?

Tax Implications

1. Income Tax benefits under NPS are not significantly higher than the existing investment options.
2. Similarly, the ‘Exempt, Exempt, Tax’ (EET) under NPS is a great discouraging factor.

Other reasons

1. In NPS, there are multiple actors: POPs, PFRDA, CRA and fund managers.
2. NPS doesn’t offer uniform rate of return.
3. Common people find this setup difficult and unsecure, unlike tried and trusted LIC or PPF.
4. NPS is not spending lot of money on ads with film stars / cricketers.
5. As far as structure and cost are concerned, NPS is the best retirement option. But people are reluctant to invest in NPS, due to taxation and liquidity issues. Mutual funds score over NPS in both these aspects, which is why financial advisors have reservations in recommending the product.

Date: 11-09-2013                                                                                                                                                                V Subramanian