New Pension Scheme

In the budget of for 2003-04 the government announced a new pension scheme (NPS) based on defined contribution, which would be borne equally by the employee and the government. Defined contribution means monthly contribution of 10 percent of the salary and DA to be paid by the employee and equally matched by the Central Government. The contribution by the central government would only be in respect of government employees.

The pension scheme would be flexible allowing the benefits to continue even in case of change of employment. On change of employment the benefits would be transferred to an individual pension account.

The pension funds would be supervised by Pension Fund Regulatory and Development Authority (PFRDA).

All new entrants joining the central services would compulsorily be part of the new pension scheme. NPS would be available to all individuals on a voluntary basis from the date announced by PFRDA.

The NPS will use the existing network of bank branches and post offices etc. to collect contributions and interact with participants allowing transfer of the benefits in case of change of employment and offer a basket of pension choices.

The contributions would be of 2 types

• Tier-I account
• Tier –II account

Tier-I account – This account based on defined contribution which are non-withdrawable, till eligible for withdrawal. Withdrawals from this account would be taxable. Own as well as government contribution would form part of section 80C deduction.
Individuals can normally exit at or after age 60 years. At exit the individual would mandatorily be required to invest 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 he 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 annuitization would be 80% of the pension wealth.
Tier-II account – Contribution to this account is voluntary. There would be no government contribution. The amount in this account can be withdrawn anytime and there would be no tax implication. Contribution to this account is not eligible for 80C deduction.

Both the type of accounts would be managed in the same manner. They will have a central record keeping and accounting (CRA) infrastructure and several pension fund managers (PFMs) to offer different categories of schemes.
The participating entities (PFMs and CRA) would give out easily understood information about past performance, so that the individual would able to make informed choices about which scheme to choose.
This would allow a subscriber to monitor his/her investments and returns under NPS, the choice of Pension Fund Manager 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.
Pension fund managers would be free to make investment in international markets subject to regulatory restrictions and oversight in this regard.
The scheme was slated to be launched on April 1, 2009. PFRDA had started marketing of the scheme through print media on March 2. However, with the election code of conduct being announced, the pension regulator decided to put off the campaign.