Highlights of the Bill

• The Pension Fund Regulatory and Development Authority Bill, 2011 seeks to give statutory powers to the interim authority set up in 2003.  It also alters the name of the New Pension System to National Pension System (NPS).

• NPS is a ‘defined contribution’ scheme for all central government employees who joined after January 2004.  It is implemented through a combination of retailers, pension fund managers, and a record keeper.  This scheme is different from the earlier ‘defined benefit’ scheme.

• Under the NPS, every subscriber will have an individual pension account, which will be portable across job changes.  The subscribers will choose fund managers and schemes to manage their pension wealth.  They will also have the option of switching schemes and fund managers.

• The NPS was extended to all general citizens through central government notification in May 2009.

Key Issues and Analysis

• The Bill provides a structure (NPS) to plan for old age income security.  However, it is optional for those in the unorganised sector.  This differs from the system in countries such as the United States, which have a mandatory system to ensure that all persons have old age income security.

• The NPS is a defined contribution scheme.  It is different from existing pension schemes in the organised sector such as the EPS, and the GPF.  Both the EPS and GPF are defined benefit schemes.

• In the NPS, the investment risk is entirely borne by the employees.  They are no longer exposed to the risk of default by the government as was the case under the defined benefit system.

• There will be no explicit or implicit guarantee on the pension wealth, except in cases where the subscriber purchases market based guarantees.   This rule is different from the case of bank deposits, where deposits up to Rs 1 lakh are guaranteed.

• The total corpus and number of enrolments to the NPS have been lower than expected.  Recommendations have been made by different committees to the government to make efforts to popularise the scheme.

Read the complete analysis here