New Pension Bill (PFRDA Bill 2011- Frequently asked questions)
Q.1- What does the new pension law do?
The PFRDA Bill 2011 (proposed to be enacted as a law) provides for the establishment of an Authority to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.
An Interim Authority has already been created vide Govt Resolution dated 10th October 2003 and 14th November 2008 and is fully functional. The passage of the bill will confer statutory status to the Interim PFRDA to develop and regulate National Pension System (NPS) earlier known as New Pension Scheme.
Q-2. What is NPS ?
The National Pension System reflects Government’s effort to find sustainable solutions to the problem of providing adequate retirement income.
NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account. Under the NPS, the individual contributes to his retirement account and also his employer can also co-contribute for the social security/welfare of the individual.
NPS is designed on Defined contribution basis wherein the subscriber contributes to his account, there is no defined benefit that would be available at the time of exit from the system and the accumulated wealth depends on the contributions made and the income generated from investment of such wealth. Eventual pension wealth is based on the level of contributions made over the years, the charges (administrative and fund management) deducted from the funds and the returns achieved by the investment fund (pension fund managers) used over a period of time during the accumulation phase in NPS.
The greater the value of the contributions made, the greater the investments achieved, the longer the term over which the fund accumulates and the lower the charges deducted, the larger would be the eventual benefit of the accumulated pension wealth likely to be.
Q.3- Why should one subscribe to a pension fund?
Pension ensures that a person has steady and adequate financial security during his old age, even after he has retired from employment or his earning capacity has extinguished/decreased.
Q.4 What does the pension bill propose?
The PFRDA Bill 2011 (proposed to be enacted as a law) provides for the establishment of an Authority to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto. This Authority viz. PFRDA shall administer the National Pension System for subscriber’s interest in accordance with the provisions of the PFRDA Act and the rules and regulations framed thereunder. The Authority has the mandate to regulate all other pension funds (other than NPS) which are not regulated by any other enactment.
Q.5- Is it compulsory ?
NPS is compulsory in respect of persons appointed to public services in connection with the affairs of the Union, or to All-India Services, on or after 01.01.2004. It is also compulsory in case of employees of Central Autonomous bodies. NPS is also applicable in respect of employees of various State Governments and its autonomous bodies, who have joined NPS and in respect of whom, such state Governments have extended NPS based on the notifications issued by such States.
NPS is voluntarily extended to the citizens of India w.e.f May 2009, who may choose to be covered under NPS. NPS has also been extended to various Corporates, who may choose to provide the scheme to their employees on a voluntary basis.
Q.6 When was it first introduced?
The PFRDA Bill 2005 was introduced in Loksabha in March 2005, but could not be considered and passed due to dissolution of 14th Loksabha. Prior thereto the PFRDA Ordinance 2004 was promulgated on 29th December 2004, which lapsed on 7th April 2005.
Q.7 Can one decide how much on ones savings should go into stocks and how much in debt?
Presently, in respect of government employees, the investment choice in asset class E (Equities), asset Class C (Corporate Debts) and Asset Class G (Government Securities) is in accordance with investment pattern contained in Ministry of Finance notification No. F. No. 5 (88)/2006 –PR.— dated 14thAugust 2008. For others different schemes are applicable based on the choice exercised by the subscriber.
Q.8 If stock prices crash, will pension be affected?
The rate of return and NAV (Net Asset Value) of the subscriber will be susceptible to market risk.
Q.9 Can one choose the stocks in which pension fund will put the money ?
Pension Fund Managers based on their expertise will choose the stocks for investing the collective monies of the subscriber (under full disclosure to the NPS Trust). However individual subscriber will not have the option of choosing a particular stock.
Q-10 Can one withdraw money whenever one wants or only after one retires ?
The subscriber can exit from NPS and withdraw the accumulated pension wealth in the following manner and no other exits or withdrawals are permitted presently:
a. Upon attainment of age of 60 years : At least 40% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity providing for the monthly pension of the subscriber and the balance is paid as a lump sum payment to the subscriber.
b. Upon Death (irrespective of cause): The entire accumulated pension wealth (100%) would be paid to the nominee / legal heir of the subscriber and there would not be any purchase of annuity/monthly pension.
c. Exit from NPS before attainment of age of 60 years (irrespective of cause): At least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity providing for the monthly pension of the subscriber and the balance is paid as a lump sum payment to the subscriber.
Q-11 Can it help the industry?
The industry can benefit by the availability of long term funds under NPS which may be deployed to build infrastructure. The industry can also provide NPS as an important social security scheme to the employees serving in such industries.