- Date : 24/12/2019
- Read: 4 mins
Government plans to tie together all pension products under one umbrella. How will things change?
Presently there are various pension funds that are being managed by different bodies. The Employees’ Provident Fund Organisation i.e. the EPFO pension fund manages a retirement corpus, insurance companies manage superannuation funds, while mutual fund companies also collect retirement corpus. A new decision may see the entire national pension system under the purview of a single body, the Pension Fund Regulatory and Development Authority (PFRDA). If you want to understand what is National Pension System and how it works, read this piece.
The Finance Minister and the PFRDA have reached to an in-principle agreement to make necessary changes to this effect in the PFRDA Act. After the ongoing inter-ministerial consultation, the proposed changes will go through a legal vetting after which it will be presented to the cabinet, before being finally placed in the budget session. An announcement in this regard is expected to be made in the next budget.
Along with this amendment, the management of the National Pension Scheme (NPS) trust will be facilitated to the government. Some doubt, however, remains about the government’s keenness on handing over the management of the 14 lakh crore plus EPFO retirement corpus to the PFRDA. The government is also contemplating the doubling of NPS tax benefit to Rs 1 lakh and making the annuity income tax-free, which will definitely encourage more NPS registration.
The PFRDA has suggested the incorporation of a Systematic Withdrawal Plan alongside the existing annuity plan. The former will allow withdrawal over a period of time and at a higher rate of return. The benefits of a higher rate of return will probably be clearer with the help of an SWP calculator. The pension regulator seeks to get more clarity on the calculation of 49% FDI as it will need to consider both direct as well as indirect foreign investments while doing the FDI calculation.
What is the present role of PFRDA?
PFRDA promotes compulsory and voluntary pension schemes in the country and is the custodian for the NPS. Intermediate agencies like Central Record Keeping Agency and Pension Fund Managers are part of the PFRDA. Other roles of PFRDA also include raising awareness about pension among the general public, addressing grievances related to pension schemes and resolving disputes between customers and intermediaries (like banks and companies).
What are the various pension options available in India?
Some of the popular pension schemes available in India are:
- Employees Provident Fund Scheme, which is available to salaried people. This is subject to the contribution and withdrawal rules and has three distinct parts under the EPFO unified login, the Employees Provident Fund, the Employee Pension Scheme and the Employee Deposit Linked Insurance Scheme. Then there is the Voluntary Provident Fund, which is an extension of the EPFO services.
- Public Provident Fund is a scheme available for the salaried as well as workers from the unorganised sector.
- Mutual funds also have long-term pension options.
- NPS is a voluntary retirement scheme which was launched by the government.
- Pradhan Mantri Vaya Vandana Yojana is a pension scheme run by the Life Insurance Corporation of India and is available until this financial year only.
- Atal Pension Yojana is an affordable pension scheme designed specifically for the unorganised sector.
Why is clarity required in FDI rules for pension funds?
There is no separate FDI rule for pension funds and it is aligned to the FDI rules applicable to the insurance sector. The FDI policy says that up to 49% direct investment is allowed under the FDI route. The pension sector wants clarity on the allowable limit under direct as well as indirect investment. It is not clear if an indirect investment should be included in the 49% limit or not. Indirect investment is the investment made by an Indian company, which in turn is controlled by foreigners. Have a quick look at NPS performance in the last 5 years.