Rajya Sabha passes Pension Bill: All you need to know about NPS

A long-pending, key economic reform legislation - the Pension Fund Regulatory and Development Authority (PFRDA) Bill 2011, which opens the doors to 26 percent foreign direct investment (FDI) in pension funds, was approved by the Rajya Sabha on Friday.

The bill aims to create a regulator for the pension sector and extend the coverage of pension benefits to more people.

The Pension Bill has been hanging fire since 2005 when it was first introduced in the Parliament. It was again reintroduced in 2011. Replying to the debate on Pension Bill, Finance Minister P. Chidambaram said 26 states have joined NPS and it would help extend pension benefits more people.

Here’s a look at the key features of the Pension Bill:

*With the passage of the bill, more citizens of the country will be able to get pension cover. NPS has a corpus of around Rs. 35,000 crore with around 53 lakh subscribers, including those of 26 state governments.Currently just 12 percent of active workforce in the country has any formal pension or social security plan.

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*Under the National Pension Scheme every subscriber will have an individual pension account, which will be portable across job changes. The subscribers will get to choose fund managers and schemes to manage their pension wealth. They can also switch schemes and fund managers.However, under the scheme, investment risk is entirely borne by employees.

*There is also an income security plan optional for the unorganised sector.Swavalamban Scheme was been launched by the Government of India to encourage people from the unorganized sector to voluntarily save for their retirement. The scheme was launched in 2010-11 budget.

* The Pension Fund Regulatory and Development Authority Bill 2011 will give statutory powers Pension Fund Regulatory and Development Authority (PFRDA) which was established in August 2003 as a regulator for the pension sector.With statutory powers the authority can pull up errant pension sector participants and ensure better subscriber protection.

*The Pension Bill would also provide subscribers a wide choice to invest their funds, depending on their capacity to take risk. A subscriber seeking minimum assured returns can opt schemes providing minimum assured returns, as may be notified by the PFRDA.The only missing aspect of the NPS architecture is tax benefit as the 60 percent corpus a subscriber can withdraw on maturity is taxable.

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*The Bill allows 26 percent foreign direct investment (FDI) in pension funds.

* The Bill, which grants statutory status to the PFRDA, will actually be opening a kitty of Rs 35,000 crore for investment. The NPS has 52.83 lakh subscribers, including those belonging to 26 State governments. Chidambaram said, “Rs 35,000 crore should not be used by un-statutory authority. All this Bill does is make un-statutory authority, a statutory authority…with powers to penalise.”

*The passage of the bill could see pure pension products coming into the market. At present most of the pure pension products available in the market are linked with insurance coverage.

*The Pension Fund Regulatory and Development Authority Bill 2011 seeks to promote the pension sector by establishing a regulator as India does not have a universal social security system.

*It was highlighted that the Bill gives the subscribers the option of investing their funds in schemes with assured returns, like government bonds, as well as in other funds which entail taking risk.

*The Bill also permits withdrawals from individual pension funds subject to certain conditions, such as frequency and limits.

*The pension bill could help channelize funds into building long-term assets for the country, including the infrastructure sector. The government wants to ease rules for insurance and pension sectors to allow them to invest in infrastructure, where it is seeking $1 trillion investment till 2017.

Experts’ Views:

Commenting on the passage ofPension Bill, Ashvin Parekh, Senior Expert, E&Y says, “Parliament has really approved of a very important bill. This will recognise the authority which has been under existence by way of ordinance.” Parekh told CNBC-TV18 in an interview that it does give the new authority a lot more powers to put things together particularly in the voluntary pension area.

Rajiv Lall, Executive Chairman,IDFCtoo thinks passage of Pension Bill is very good news and is hopeful of Insurance Bill too coming and also a break through on Goods and Services Tax (GST).