National Pension System: HR interest far from retiring

With the Pension Fund Regulatory and Development Authority Bill finally getting passed, the National Pension System is becoming popular with companies.

According to human resource firms, more and more companies are showing interest in this scheme.

The pension Bill provides for establishing a statutory PFRDA to promote old-age income security and to protect the interests of subscribers to the various schemes of pension funds.

The Bill empowers PFRDA to regulate the NPS and schemes not covered under any other Act.

Anuradha Sriram, benefits director at Towers Watson India, said: “There is a lot of corporate interest being seen in NPS after PFRDA had been given statutory powers.

"We are advising both Indian firms and multinational corporations in India to now consider corporate NPS as a possible solution.

Naturally, there are several factors that need to be considered when selecting an optimal benefits solution and these may vary from company to company.”

NPS was adopted by the Centre based on defined contributions in respect of all new entrants to central government services, except the armed forces, with effect from January 1, 2004.

PFRDA has also made NPS available to all Indian citizens from May 1, 2009 on a voluntary basis.

PFRDA launched a separate model to provide NPS to the employees of corporate entities, including public sector units, since December 2011.

This model is titled ‘NPS – corporate sector model’.

Under this model, subscribers will have the option to decide as to how the NPS pension wealth is to be invested across asset class E (up to 50 per cent), asset class C, and asset class G.

Asset class E includes investment in predominantly equity market instruments, asset class C is investment in fixed income instruments other than government securities and asset class G is investment in government securities.

According to a senior human resource head with a global manufacturing firm, NPS has become an attractive option with the uncertainty on PFRDA's regulatory status being removed.

“We will, however, make it optional for employees,” said the official.

In order to invest in an NPS, it is mandatory for an individual to open a Tier-I NPS account where withdrawal is not allowed.

However, after opening the Tier-I account, one can start a Tier-II account where partial withdrawal is allowed.

Up to 20 per cent of the funds can be withdrawn from NPS before one turns 60; the rest has to be used to buy annuity.

The pension earned after retirement is taxable at slab rate for NPS.

An employee’s contribution of only up to 10 per cent of the basic and dearness allowance is eligible for deduction under Section 80 CCD (this amount is within the Rs 100,000-limit, under section 80C).

Another unique feature of the NPS is the tax benefit it offers under the newly-added Section 80 CCD(2).

If an employer contributes 10 per cent of the salary (basic salary plus dearness allowance) to the employee’s NPS account, this amount gets a tax exemption of up to Rs 1

lakh.

This is over and above the Rs 1 lakh tax deduction under Section 80C.

This tax saving could be substantial in the senior and top management levels.

With tax benefits, companies are more eager to invest in NPS than the other pension products available in the market from insurance companies, explained a New Delhi-based human resource consultant.

Although more and more companies are subscribing to the NPS and others are examining the prospects of the product, most insurers aren't comfortable with subscribing to NPS as they see it as a competition to their pension products.

Corporates may choose pension fund manager for its employees or let employees select their pension fund managers. There are eight pension fund managers for the private sector.

“It is a competing product.

"We would rather encourage my colleagues to buy pension plans, which are superior products.

"Additionally, there are unit-linked ones also in the industry, which will give better long-term returns to the policyholders. NPS, in comparison, limits the equity exposure, capping the long-term returns,” said a CEO of a life insurance company.

P Nandagopal, managing director and CEO of IndiaFirst Life Insurance, says he has asked the human resource team to look into the product.

"As an employer, I cannot dictate my choice on the employees.

"I will have to give them a choice between NPS and pension plans.

"However, as an employee, I feel pension plans are a superior to NPS.

"Pension plans offer compulsory guaranteed returns and has a mandate to offer annuity.

So, policyholders would know the product end to end. In comparison, NPS is largely an accumulation product.

"There is no clarity on the annuity part of it,” he explains.

He admits that on the tax benefits front, NPS looks attractive to pension plans.

While the pension Bill has been passed, no formal statutory announcements have been done by PFRDA with respect to any changes in NPS, to make it more flexible.

According to HR experts, the procedure for governance has to be made transparent. Sriram added there is a huge opportunity to scale up, but the governance process has to be robust for it to be successful.