A Savings Revolution

The New Pension System (NPS) will not only bring retirement planning to the unorganised sector but will also completely transform the investment scenario in the country.

This is good news for the workers in the unorganised sector. The fruits of long-term financial planning, which have been available only in the organised sector, will now be available to the unorganised sector, the self-employed as well as all others who don't come under the ambit of any pension system. In a reform long overdue, the Pension Fund Regulatory & Development Authority (PFRDA) has finally put the NPS in motion.

An individual will be able to open an NPS account with a designated 'point of presence' (POP) and start saving for a pension. Moreover, this system is not for private individuals only, the pensions of all central government employees who have joined service after January 2004 will also be a part of the NPS.

The design of the NPS is simple. The POPs will be the front end, the National Security Depository Limited (NSDL) will be the record keeper and six entities selected by the PFRDA will be given the task of managing the funds.

The distinguishing feature of the NPS, when compared to any other type of investment, is that it's shockingly low cost.

To know more about this new system and the various plans - comprising of equity, government securities and corporate bonds - that it offers, pick up the March 2009 issue of Mutual Fund Insight.

The magazine's cover story talks in length about the NPS and its revolutionary design as well as its few downsides. Furthermore, in a exclusive interview, Dhirendra Swarup, head of PFRDA talks about the challenges and opportunities that lie ahead for the NPS.

“The NPS is voluntary in nature and there are no commissions in our system where a selling agent will push our product,” he says.

Pension for all from May 1

All citizens of the country will be able to avail of pension facility from Friday, with the interim pension regulator PFRDA confirming the scheduled launch of the mega pension plan in a statement on Thursday.

"The necessary infrastructure for the rollout of New Pension System (NPS) is now ready and it will be available to all citizens of India from May 1, 2009," Pension Fund

Regulatory and Development Authority (PFRDA) said. Tier-I of NPS constituting non-withdrawable pension account will become operational from tomorrow and Tier-II (withdrawable account) of the NPS account will become operational in about six months.

Pension fund managers will manage three separate schemes, each investing in a different asset class. These asset classes are equity, government securities and credit risk-bearing fixed income instruments.

"On the basis of recommendations of the NPS Trust and on advice from the government, it has been decided that investment by an NPS participant in equity would be subject to a cap of 50 per cent," it said.

The authority has appointed 22 points of presence (PoPs) and six pension fund managers. Branches of the registered PoPs, to be called PoP service providers, will be the contact and collection point for all citizens other than government employees wanting to obtain a Permanent Retirement Account Number (PRAN).

The investment will only be in index funds that replicate either BSE sensitive index or NSE Nifty 50 index. The subscriber will have the option to actively decide as to how the investment will be in the three asset classes.

In the event of the subscriber being unable or unwilling to decide, his contribution will be invested according to the 'auto choice' option, which is based on a predefined portfolio varying with the age of the subscriber.

The NPS architecture has been operational for central government employees for over a year now - since April 1, 2008, and the NPS corpus amounting to over Rs 2,100 crore (Rs 21 billion) stands invested in it.

"The three pension funds have generated returns varying from 12 per cent to 16 per cent on the NPS corpus during the year 2008-09, weighted average return being over 14.5 per cent," PFRDA said citing unaudited results.

The states are at different stages of adopting NPS. In August 2008, the government advised PFRDA to extend NPS, currently subscribed to by government employees, to all citizens on a voluntary basis.

Central government employees, who joined service on or after January 1, 2004, are covered under NPS. Unlike the old pension scheme, in NPS both employees and the employer (in this case, government) contributed an equal amount to the pension fund. Twenty-one states have also joined the scheme.

However, NPS for all citizens will not have any mandatory obligation for employers to give matching contributions to the pension fund.

The six fund managers for the new scheme are SBI, UTI Asset Management, ICICI Prudential Life Insurance, Reliance MF, IDFC Mutual Fund and Kotak Mahindra.