National Pension System (“NPS”)
Pension reform is a major initiative undertaken by the Government of India to provide adequate retirement income. The NPS for Govt. employees has been operationalised with effect from 1st January 2004. Further, with effect from 1st April 2008, the management of the pension contributions of such Government employees has been entrusted to professional Pension Fund Manager (PFM), in line with the investment guidelines of the Governemnt applicable to non Government Provident Funds. The National Pension System has been made available to all citizens of India from 1st May, 2009, on a voluntary basis.
The NPS architecture is transparent and will be web-enabled. It would allow a subscriber to monitor his/her investments and returns under NPS, the choice of Pension Fund Manager (“PFM”) and the investment option would also rest with the subscriber. The design allows the subscriber to switch his/her investment options as well as pension funds. The facility for seamless portability and switch between PFMs is designed to enable subscribers to maintain a single pension account throughout their saving period.
PFRDA has set up a Trust under the Indian Trusts Act, 1882 to oversee the functions of the PFMs. The NPS Trust is composed of members representing diverse fields and brings wide range of talent to the regulatory framework.
The National Pension System has been designed to enable the subscriber to make optimum decisions regarding his/her future and provide for his/her old-age through systemic savings from the day he/she starts his/her employment. It seeks to inculcate the habit of saving for retirement amongst the citizens.
PFRDA also intends to intensify its effort towards financial education and awareness as a part of its strategy to protect the interest of the subscribers. PFRDA’s efforts are an important milestone in the development of a sustainable and efficient voluntary defined contribution based pension system in India.
NPS is a low cost portable Pension System having unique Permanent Retirement Account Number (PRAN) for each subscriber. There are multiple Fund Managers and multiple investment options. There is also provision for mandatory annuitisation at the time of exit.
This scheme has been made mandatory for Central Government employees who joined their service on or after 1st January, 2004 (except the armed forces). The monthly contribution is 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.
Individuals can normally exit at or after age 60 years from the pension system. At exit, the individual would be required to invest at least 40 percent of pension wealth to purchase an annuity. 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 subscriber 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.
In addition to the above pension account, each individual can have a voluntary tier-II withdrawable account at his option. Government will make no contribution into this account. These assets would be managed in the same manner as the pension. The accumulations in this account can be withdrawn anytime without assigning any reason.