Unknown virtues of new pension scheme

The New Pension Scheme, if tweaked, can create a win-win situation for investors as well as for government. While savers can benefit from forced investments in the long term, the latter can use the money for infrastructure development and social sector planned expenditure.

A defined contribution pension scheme under the New Pension Scheme (NPS) for Central government employees, who have joined service after April 1, 2004, is compulsory. It went operational in 2008-09.

The NPS structure implemented in India is very investor friendly. The investment options offer adequate flexibility.

A subscriber can invest into government security (up to 100 per cent) or corporate bonds (up to 100 per cent) and equity up to 50 per cent (only Nifty or Sensex).

The Pension Fund Regulatory and Development Authority (PFRDA) regularly monitors the performance to prevent risky investments.

The process for withdrawal on retirement at 60 years of age is 'market-proof' as it gives the option to withdraw in lump sum or on deferred basis over 10 years.

The total cost of administration of the pension account from the subscriber's perspective is among the cheapest in the world. But these virtues are largely unknown to the public.

Since 2009, over three million pension accounts have been opened with total accumulated pension wealth of around Rs 21,000 crore (Rs 210 billion).

Out of this, the pension wealth accumulated under the voluntary scheme is less than Rs 150 crore, or Rs 1.5 billion, (about 60,000 accounts) vis-a-vis pension wealth of government employees of Rs 20,850 crore (Rs 208.5 billion). Clearly, policy initiatives are required for encouraging voluntary subscription.

PFRDA appointed the Committee to Review Implementation of Informal Sector Pension (CRIISP) to review the implementation

of NPS.

The committee identified that under the unbundled structure, no intermediary owns up the responsibility for marketing. While the committee examined the role of all intermediaries in the structure, it did not examine the role of government as a stakeholder.

As the pension wealth accumulation grows, government can seek funds from pension funds for infrastructure development and social sector planned expenditure. The success of NPS will partially relieve the government's social security burden.

There is also a need to raise the awareness about the tax benefits of the scheme for employers, HR professionals, and employees to motivate them to participate in it.

PFRDA introduced the 'NPS for corporates' scheme under which the corporate is the nodal point to offer NPS facility and will be responsible for collection of subscriptions as part of salary administration.

The Income Tax Act allows 100 per cent of employer's contribution to employees' pension fund under NPS subject to a maximum of 10 per cent of salary of employees.

A mere reallocation from the 'cost to the company' towards contribution to the pension scheme helps employees get substantial tax benefits plus systematic retirement savings.

The pension wealth accumulated under NPS will be available for withdrawal only at the age of 60 years, unlike other types of long-term savings.

The government may create tax incentives around this USP of assured accumulation of pension wealth and attract them towards systematic pension savings.

There is a need for offering exclusive additional deduction besides the current 80 CC options to encourage wage earners to participate in the NPS.

An awareness campaign on old-age financial security and NPS needs to be taken up, as today's demographic dividend will become a demographic burden 20 years later.

The writer is CEO, Kotak Mahindra Pension Fund Ltd