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Reforms in NPS to benefit pensioners

By Tensing Rodrigues

National Pension System (NPS) is a pension facility that was launched by the government for its employees in January 2004. As a part of the government’s pension reforms, it replaced the existing defined benefit pension for GOI employees by a defined contribution pension.

That made a big difference. Under the old system the GOI pensioners could get a pension calculated on the basis of their last drawn salary. Under the new system it is not so. Under the new system the pension is calculated based on the accumulated balance in the account of the pensioner.

This drastic change was made based on the experience of several other countries. Over time, and due to the overall aging of the country’s population, the pension liability of the governments was rising, while the contributors to the common pension fund were getting lesser and lesser. The governments realized that this was untenable, and sooner or later the public treasury would be bleeding. It was also unjust, as the working population would have to bear an excessive burden of funding the pension payments.

So the governments of many countries affected by this malaise switched over from a ‘defined benefit pension’ to a ‘defined contribution pension’. Though India was far from the brink it decided to make the switch. It was a very wise decision.  Our demographic profile was still biased towards young – that is, our working age population contributing to the pension corpus was still more than the pensioners drawing upon it. But in course of time we would get into the crunch. It was necessary to get our defined contribution pension system in place before we reach that point.

In the new system each employee has a separate pension fund, which is used to fund her pension payment. So this system is self-sustaining, and does not make undue demands on the public treasury. Of course during the active service of the employee the government, as the employer, contributes to the pension fund of the employee – as much as the employee contributes, up to a fixed percentage of the salary. In the following years, many state governments and public and semi-public organisations joined the NPS. 

In 2009 NPS was thrown open to the public. Any individual can now open a NPS account and contribute to her own pension fund. Of course, there would not be a matching contribution from the GOI. On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement. A lot of tax benefits were given to NPS to make it attractive; rather undue benefits were given.

 Any Indian citizen between 18 and 60 years can join NPS, subject to KYC. NPS has two types of accounts, Tier I account and Tier II account. Tier I account is for the employees of GOI and others who mandatorily participate in NPS. In other words it is for those who officially come under NPS. Such employees can enhance their pension contribution by opening a Tier II account where they can contribute beyond the mandatory percentage of the salary. And the employer will not match their contribution.

Any other individual can also open a Tier I and Tier II accounts. Tier I account is mandatory to open a Tier II account. The Tier I and Tier II pension accounts are managed separately. Separate rules govern the contributions to the two types of accounts. The norms for withdrawal from the corpus are also different. The norms for withdrawal from the Tier I corpus are more stringent. The Tier II contribution being voluntary, norms for withdrawal therefrom are more liberal.

One good thing that was done in case of NPS was that the combined pension corpus – the aggregate of the individual pension corpuses – is not managed by the government. Right from the beginning prudence demanded that it should be managed by the professional fund managers. After a lot of teething troubles, it fell in place. The resistance was from several quarters.

First and foremost private fund management was a new ball game for the government. It did not fit in the ‘ethos’ of a socialistic state. And it is difficult for any government to let such a huge booty go out of its hands. It had long enjoyed playing with the booties of LIC and UTI. It had covered up what was basically its irresponsible greed by offering LIC and UTI guarantees – that government would make up any loss. But that making up obviously would be done, and was done, at the cost of the taxpayer.

It was good that finally saner counsel prevailed, and now the pension corpus is being managed by eight pension fund managers. ICICI Prudential Pension Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Fund, UTI Retirement Solutions Pension Fund, HDFC Pension Management Company and DSP BlackRock Pension Fund Managers.

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