The concept of pension (as an organized form of postretirement plan) was primarily restricted to the government employees in India in its early days. Post the liberalization reforms in early 1990s which opened doors to private entities in the insurance sector, the Indian salaried class witnessed a sudden mushrooming of insurance companies offering various forms of retirement benefits, primarily in the form of ULIPs. In the absence of a statutory regulator to monitor and regulate the functioning of these schemes, however, the investors were reluctant to cash in on these schemes. At the same time, the pension product market was witnessing an unorganised growth, which was likely to put subscribers/ investors on the backfoot in the years to come.
In 2000, the Old Age Social and Income Security (OASIS) Report, under the chairmanship of Dr. S.A. Dave, recommended that pension schemes be extended to the unorganised sector as well. A dream saw the dawn of its era on September 20 this year when President Pranab Mukherjee gave his assent to the Pension Fund Regulatory & development Authority Act 2011 (“The New Pension Act”).
The new Act is aimed to provide subscribers a wide choice to invest their funds, including assured returns by opting for equity, debt and government bonds, as well as in other funds depending on their capacity to take risk.
The NPS was first rolled out from May 1, 2009, at various locations across the country which is now consolidated in the new system via Section 13 of the New Pension Act. The main institutions created under the Act include:
The Authority has the following responsibilities under the Act which include:
The NPS is based on the principle ’you save while you earn’ especially for retirement. Among other things, the National Pension System shall, on the commencement of this Act, have the following basic features, namely:
Some of major differences between NPS and other schemes {such as Employee Pension Scheme (EPS) and General provident fund (GPF)} include:
Under the NPS, PFMs offer an array of schemes with differing risk-return profiles. The final pension wealth will depend on the performance of the schemes chosen by the subscriber. However, the subscriber is exposed to risk at the time of exit from the scheme. If there is a major market shock at the time of retirement, leading to a fall in asset prices, the entire accumulated wealth is at risk.
In the past, for instance during the recession in the United States in 2008, a major chunk of pension money was wrongly invested leading to sub-prime crisis. Despite risks, it is hoped the new Act is a step in the right direction for it gives additional and improved post-retirement planning options to the subscribers. We can draw some hope from the statement of Finance Minister P Chidambaram, who said: “There is enough structure in place in NPS that funds will be managed well and safely. NPS gives better returns than EPS. The returns are more than government bonds. Returns are quite adequate.”
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