Monday, May 11, 2009


At long last the Government of India has announced the new pension Scheme for the general Public on May Day. The new pension was earlier announced for the employees of Government of India only. Now any citizen of India would be able join the scheme and plan their livelihood in old age. This, however, is not the only pension scheme in the country. In fact before this scheme was introduced there were two distinct pension schemes in existence. The first one was from insurance companies and the second one was from Mutual fund Houses. Then why everyone was waiting relentlessly for this plan to be introduced ?
There are few reasons. In India people generally tend to believe the Government more than private sector. Secondly, the new pension scheme is simple and Thirdly it is cost effective and fourthly it would be managed by experts and has incorporated checks and balances so that citizens do not loose heavily when money is required most.

The scheme envisages that in younger age more investment would be made in equity and slowly as the citizens grow older more investment would be diverted to government bonds and fixed deposit of banks etc. This would ensure low volatility. Even with such checks and balances it would not be possible to predict the exact return, as investment would be market- linked. In this connection it would be worth mentioning that employees in the organized sector already have ‘ employees pension scheme’ where employers and employees contribute 8.33% and 3.67% respectively of salary. The return from the scheme is pretty low. The new scheme provides for better return as part of the money would be invested in equity market. However the invested money would be possible to be taken out of the scheme only when citizen reaches the retirement age of Sixty years. Upon retirement 40% contributions of subscribers will be put under annuity scheme to enable them to get monthly pension.Balance can be taken out within 70 years at any time in one or more installments. In exceptional circumstances contributions can be taken out before retirement but 80% money shall have to be put in annuity scheme.

The regulators have classified investment under three categories-E, G, and C from which citizens would be able to choose their portfolio. E class assets means high return and high risk meaning equity participation through index fund. Under the G asset class the investment is restricted to Government bonds etc. Under class C asset investment would be made liquid fund of MF, fixed deposit of banks etc. In case Government employees mere 5% fund could be invested in equity where as in general citizens category at least 50% investment could be made, in stock market. In case citizens want they can leave the investment choice to fund managers. This system would be known as “auto choice”. Who can join the scheme?

Any Indian citizen between 18 and 55 years would be able to subscribe to the schme. At present, only tier-I of the scheme, involving a contribution to a non-withdraw able account, is open. Subsequently tier-II accounts, which permit voluntary savings that can be withdrawn at any point of time, can be opened. But to be eligible to open a tier-II account, you need a tier-I account. To enroll subscribers will need to visit a point of presence (PoP), fill up the prescribed form with the required documents. Once you are registered, the Central Recordkeeping Agency (CRA) will send you a Permanent Retirement Account Number (PRAN), along with telephone and internet passwords. There is no investment ceiling. But the minimum investment limit has been fixed at Rs 500 a month or Rs 6,000 annually. Subscribers are required to contribute at least once a quarter but there is no ceiling on how many times you invest during the year. Subscriber will have to bear a penalty of Rs 100 per year of default and will need to pay it with the minimum amount to reactivate the account. Also, dormant accounts will be closed when the account value falls to zero. A friend asked me is there any guarantee? My reply was No. There is no guarantee since NPS is a defined contribution scheme and the benefits depend on the amount contributed and the investment growth up to the time of exit.
At the moment, the Pension Fund Regulatory and Development Authority (PFRDA) has selected six fund managers — State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance — on the basis of a bidding and technical evaluation process. What happens if someone shift out of the city where he has taken the NPS? The PRAN remains the same and you can access a toll-free number (1-800-222080). The details of your PRAN and the statement of transactions will be available on the CRA website (
According to me the new pension Scheme is a good instrument and people who are professionals and working independently like Journalists ,Advocates, Doctors, Consultants Singers , Artist, and small business persons may find it useful. It is up to individual person and his risk apatite whether to buy share or to subscribe to NPS. We welcome the new scheme, for its risk adjusted profile.


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