Demystifying the new pension system

Here is all that you wanted to know about the new pension scheme and pension fund managers.

What is the new pension system (NPS)?

The NPS is a scheme based on defined contributions by members and matching contributions from employers in the case of central and state government employees. All central government employees who have joined after January 1, 2004 will be covered by the NPS. A total of 19 state governments have so far notified participation in the NPS.

The NPS is not applicable to individuals covered by the Provident Fund Act. The central government employees will contribute 10 per cent of salary plus dearness allowance and the government will contribute a matching amount.

The new pension system will be voluntary for self-employed individuals, private companies and the un-organised sector, and there will be no contribution from the government in respect of individuals who are not government employees. The funds will be managed by pension fund managers (PFMs).

Who will be the pension fund manager?

A pension fund manager will be a subsidiary specifically floated for managing the pension scheme funds by entities with at least five years of fund management experience and adequate financial strength.

The interim Pension Fund Regulatory and Development Authority has begun the process of shortlisting the sponsors of PFMs. It has called for expressions of interest from public sector entities for sponsoring fund managers.

The selected sponsor will have to incorporate a pension fund manager as a separate public sector company. The PFRDA's decision to allow only public sector entities to pitch for being a PFM has irked private sector entities keen on sponsoring a PFM.

The PFRDA had earlier said it would appoint a limited number of leading professional firms to act as PFMs and one of these PFMs will be a public sector agency. The number of PFMs is likely to be capped at four.

A final call is expected to be taken after the PFRDA Bill is passed by Parliament. LIC, SBI Mutual Fund and UTI Mutual Fund are the key contenders for sponsoring PFMs.

What are the FDI guidelines for PFMs?

The entity setting up a PFM can have a 26 per cent direct or indirect foreign equity partner. The foreign equity holding cap is the same as for the insurance sector.

What are the investment guidelines for PFMs?

Each PFM will offer a slew of investment schemes. Every pension fund member will be free to choose any of the following schemes for investing his savings:

Scheme A -- This scheme will invest mainly in government bonds

Scheme B -- This scheme will invest mainly in corporate bonds and partly in equity and government bonds

Scheme C -- This scheme will invest mainly in equity and partly in government bonds and corporate bonds

What are the fees or charges under the NPS?

A member of the NPS will have to pay a fee to the central record-keeping agency (CRA), which will maintain all accounts and also to the PFM which manages his savings. These charges will be deducted from his savings on a periodic basis. The fees and charges by the CRA and PFMs will be regulated by the PFRDA and is under discussion.

The fund management charge for mutual fund investors is currently 2.5 per cent of the investible corpus, which is paid at the end of the year. The fund management fees to be levied by the NPS are expected to be the same as in the case of mutual funds.

Which is the central record-keeping agency?

The interim PFRDA has appointed National Securities Depository Ltd (NSDL) as the record-keeping agency to implement the NPS.

What has happened to the money that has been deposited by employees who joined after January 1, 2004?

The money is used by the central and state governments and a fixed interest of 8 per cent is being paid per annum.

How much money is already accumulated with the pension fund that will be available for investment when the new system becomes operational?

About Rs 1,700 crore has accumulated in the NPS corpus since January 1, 2004 and around 3,00,000 central and state government employees have joined the scheme till March 2007. The funds are expected to give a higher return when invested according to an interim investment pattern that may allow 5 per cent direct investment in equities and 10 per cent in equity-linked mutual funds.

What is the Left parties' opposition to the new pension system?

The Left parties want the government to offer guaranteed returns to subscribers, but the government says the returns will depend on income from investments. The Left parties oppose foreign investment in pension fund managers but the government is keen on allowing foreign investment to the extent permissible in insurance -- 26 per cent at the moment.

Is joining the NPS optional?

The NPS is mandatory for all new recruits in central government (except armed services) and in state governments, who have joined the system. A total of 19 state governments have notified the NPS and 6-7 more states have expressed their willingness to join the system.