New pension scheme launched
Ashish Gupta explains the terms and conditions of this new scheme extended to all by the pension fund regulator
The pension fund regulator has extended a new pension scheme (NPS) from May 1. The NPS is already mandatory for all government employees who have joined service after January 1, 2004. While the scheme is already operational for the central government employees, it opened for the others from May 1. Unlike the traditional retirement solutions such as PPF and EPF, the NPS is not a defined benefit, but rather a defined contribution plan. Thus, while investments in PPF and EPF attract a fixed rate of interest, returns from the NPS will be marketdetermined.
The market here, however, is not confined to equity alone. It includes corporate bonds and government securities. Investments in these papers are to be actively managed by fund managers. The Pension Fund Regulatory and Development Authority (PFRDA) has designated six asset management companies (AMCs) for the purpose.
Though the NPS will be managed by fund houses, the autonomy lies with the PFRDA. While AMCs take investment decisions for the NPS, their operational freedom will be confined to the guidelines issued by PFRDA from time to time. Again, while a mutual fund investor can enter and exit a scheme at free will, the NPS will bind them till the retirement age of 58 years. The current guidelines do not permit a premature withdrawal or any loan against investments in NPS.
The onus of choosing the structure of investments and selecting the fund house has however, been left to the investor. The investor is free to choose the mix of equity (E), corporate bonds (C) and government securities (G) in his portfolio.
The PFRDA has stipulated that only half of an individual's savings can go into equities even if he opts for a high-risk high-return investment. The auto (default) choice for persons who do not make an investment choice also caps the equity exposure at half of the savings.
The investment norms allow subscribers to invest their entire savings in government securities or corporate, state and municipal bonds, which are not as risky as equity. As per the revised 'auto choice', half of the investments of subscribers up to an age of 35 years will go into equities, one-fifth into central and state government bonds, and the rest into corporate bonds and select other instruments, including fixed deposits. At the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80 percent in central and state government bonds.
According to PFRDA, the equity exposure limit was reduced based on the recommendations of the board of trustees of the NPS and the advice of the government. This cap would be reviewed after a year. The Deepak Parekh panel has also recommended a review of the investment pattern after one year. Worldover, pension plans do not allow 100 percent equity investments. In the US, equity exposure is allowed in the range of 50-70 percent.
PFRDA has reclassified liquid funds of SEBI-regulated asset management companies and fixed deposits of banks as instruments of medium returns for credit risk. Accordingly, these instruments can account for 30 percent of the investments in the auto choice for those up to 35 years.
PFRDA has also recommended to the government that the scheme be exempt from tax when money is withdrawn. While contributions, returns and withdrawals under the PPF, EPF and General Provident Fund (GPF) are exempt from tax, in the case of the NPS, only contributions and returns are exempt from tax.
The NPS requires maintenance of all records and this will be done by the NSDL, which will act as the central record keeping agency (CAR). Each investor will thus be required to pay NSDL an account opening charge of Rs 50. Besides, there will be a maintenance charge of Rs 350 per year and an additional charge of Rs 10 per transaction.
PFRDA has also appointed some banks as points of presence (POP) to facilitate quick and hasslefree transactions. However, these services are not free either. According to an industry source, a POP will also charge an investor an account opening fee of Rs 20 and an additional charge of Rs 20 per transaction. This implies that an investor seeking to invest Rs 500 per month will actually end up paying around Rs 560 per month. That is nearly 11 percent as transaction costs, considerably higher than the eight percent returns offered by PPF.

Courtesy: Economic Times, 3rd May 2009, Bangalore