Proposal to change in National Pension System (NPS)
- Posted By
4th May, 2021
The changes has been proposed for NPS to a clamour for a guaranteed return product for large sections of potential investors with a high aversion to risk.
About the NPS
- It was started as the New Pension Scheme for government employees in 2004.
- It started under a new regulator called the Pension Fund Regulatory and Development Authority (PFRDA).
- The National Pension System(NPS) has been open for individuals from all walks of life even to cover the informal sector also.
- The already existing Employees’ Provident Fund Organisation, which is contingent on a formal employer-employee relationship, only covers a fraction of the workforce.
Employees’ Provident Fund Organisation
- The Employees' Provident Funds Bill was introduced in the Parliament as Bill Number 15 of the year 1952 as a Bill to provide for the institution of provident funds for employees in factories and other establishments.
- The Act is now referred as the Employees' Provident Funds & Miscellaneous Provisions Act, 1952 which extends to the whole of India.
- is under the jurisdiction of the Ministry of Labour and Employment.
- The Act and Schemes framed there under are administered by a tri-partite Board known as the Central Board of Trustees, Employees' Provident Fund,consisting of representatives of Government (Both Central and State), Employers, and Employees.
- The Central Board of Trustees administers a contributory provident fund, pension scheme and an insurance scheme for the workforce engaged in the organized sector in India. The Board is assisted by the Employees’ PF Organization.
- The NPS has been gradually growing in size and now manages ?78 lakh crore of savings and 4.24 crore accounts in multiple savings schemes.
- Of these, over 3.02 crore accounts are part of the Atal Pension Yojana (APY), a government-backed scheme for workers in the unorganised sector that assures a fixed pension payout after retirement.
- The rest constitute voluntary savings from private sector employees and self-employed individuals, for whom some significant changes are on the anvil.
What overhaul is the PFRDA planning?
- The law regulating the NPS allows members to withdraw just 60% of their accumulated savings at the time of retirement. With the remaining 40%, it is mandatory to buy an annuity product that provides a fixed monthly income to retirees till their demise.
- Members who accumulate up to ?2 lakh in their NPS account at the time of retirement are exempted from the mandatory annuitisation, and can withdraw the full amount.
- Now, this limit will soon be revised to ?5 lakh.
- Separately, the regulator has decided that the annuity purchase stipulation for 40% of members’ retirement corpus should be dropped altogether.
- Legislative amendments to this effect are being worked out for Parliament’s approval.
What prompted this rethink?
- Falling interest rates and poor returns offered by annuity products had triggered complaints from some members and experts about the compulsory annuitisation clause.
- If someone opts for a lifetime annuity at retirement with a return of purchase price to the nominee once the person dies, the rates are varying between 5% and 5.5%.
- Since annuities are taxable, deducting the tax and factoring in the inflation means annuities are yielding negative returns.
- With retail inflation running at about 5%-6% over the past year, the returns on annuities are, in fact, negative, even if one does not factor in the tax.
- While this change shall need Parliament’s nod, the expansion of the annuity-free withdrawal limit from ?2 lakh to ?5 lakh is being done immediately.
- An actuary is being appointed to suggest the design for such a product and the PFRDA hopes to launch its first guaranteed product.
- At least three more fund managers are expected to be appointed soon, which will take the total managers to ten.
- Age restrictions to join the NPS are also being eased to allow people to join the scheme up to the age of 70 years, from 65 years earlier.
- The reason is that over 15,000 recent NPS members joined after the age of 60 since the age limit was raised to 65 years from 60 years in 2017.
- So, as Indians’ overall longevity improves, the population of “retired, but not so tired” will also have access to the NPS.
Atal Pension Yojana
- It was formerly known as Swavalamban Yojana.
- It is a government-backed pension scheme in India.
- It is primarily targeted at the unorganised sector.
- It was launched in 2015.
- The minimum eligible age for a person joining APY is 18 years and the maximum is 40 years.
- An enrolled person would start receiving pension on attaining the age of 60 years.
- Government co-contribute 50% of the total contribution or ?1,000 per annum, whichever is lower, to each eligible subscriber account, for a period of 5 years