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The recent decision by the government to broaden the scope of the New Pension Scheme (NPS) by allowing all Indians to participate in it voluntarily is an important milestone in the pension reform process. The Pension Fund Regulatory and Development Authority (PFRDA) will make the scheme operational in the first half of 2009.
The PFRDA has taken significant steps towards establishing the operational and regulatory structure for the mandatory component of the NPS, which currently covers all those who have been central government employees since 1 January 2004. It has built an estimated corpus of Rs 4,000 crore. The PFRDA has appointed the National Securities Depository Ltd (NSDL) as the Central Record-keeping Agency (CRA). Till now, three public-sector fund managers have been appointed, namely, Life Insurance Corporation, UTI Asset Management and State Bank of India. But the data of individual members is yet to be transferred to the CRA.
To realise the economies of scale, it is essential that the 21 states, which have opted for the NPS so far, are encouraged to utilise the services of the CRA.
Before broadening the NPS coverage on a voluntary basis, it is imperative that the pending PFRDA Bill 2005 is passed by the Parliament during the October 2008 session. This will enable the regulator to build an environment in which Indian citizens can plan for their long-term retirement savings with confidence. The current financial turmoil in the global markets has underscored the fact that the confidence in the financial and regulatory environment can be easily eroded.
There is a need to harmonise the tax treatment of different types of retirement savings. Currently, the NPS is at a tax disadvantage compared with other retirement-saving options. In addition, the PFRDA must provide necessary incentives to distributors, develop investment products, assign fund managers and instill confidence in individuals. In each case, the PFRDA must decide whether the arrangements for the mandatory component of the NPS are also appropriate for the voluntary component.
Financial institutions and the media should contribute to educating the public about the benefits of voluntary participation in the NPS. People must be made aware of the long-term nature of retirement savings and the relationship between risk and return on investments. The PFRDA should insist that the pension fund managers follow risk-management practices.
For voluntary NPS members, a staggered withdrawal plan at the payout phase may be more appropriate than mandatory annuity. These plans permit individuals to withdraw at periodic intervals in a manner which exhausts the principal and the interest over a set period like 15 years. This will help them to retain ownership and benefit from compound interest.
The NPS has the potential to provide the necessary confidence and incentives for individuals to voluntarily save for longterm retirement. The PFRDA should ensure that this potential is realised.
— Mukul G. Asher, Professor of public policy, National University of Singapore
