There are about 3 lakh central government employees who are currently under the NPS and this number will increase with fresh recruitments. Under the defined contribution system, employees make a 10% contribution and the government backs it with an equal contribution. Till 1 April this year, the money was with the government. Now, about Rs 1,700 crore has been transferred to the fund managers. The estimated corpus is actually about Rs 6,000 crore, taking into account the Sixth Pay Commission recommendations, which are to take effect from a retrospective date.
Q. What is the investment option available for the money under the NPS?
So far, the central government employees under this scheme have been earning an 8% interest on their contributions. We were advised to follow the investment guidelines stipulated by the Ministry of Finance for non-government pension funds, which state that up to 15% of the pension money can be invested in debt instruments or in equity/mutual funds.
Q. How will the voluntary NPS for the public compare with the existing products?
Three features make the NPS different from other plans. First, it is portable across jobs and geographical locations. A subscriber will be given a unique account number, something along the lines of a PAN. With this number, he will be able to make contributions anywhere. At present, with a new job, a person has to open a new account and close the old one. The NPS is a seamless account that remains with you for your entire savings life. Second, the scheme is cost-effective. There is no entry or exit load, except for a nominal administrative charge. The cost of management is quite low, ranging from 0.03-0.05%. Third, it will offer flexibility to the subscriber, who has the freedom to choose the fund manager and investment options. A menu of options will be available, which will be reviewed as we progress.
Q. How will this pan out?
We are seeking expression of interest from fund managers and finalising rules for intermediaries, who will act as points of service across the country. However, they have to fulfil certain criteria. Primarily, they should be governed by RBI, Sebi or Irda. These intermediaries will collect contributions from subscribers. They should have strong database management skills and electronic connectivity for realtime transfer of funds. By the end of January 2009, more fund managers are likely to be short-listed based on their bids. We have constituted a committee headed by Deepak Parekh, which is working out the investment norms. Its report will be available this month.
Q. How will the consumer grievances be dealt with?
We want to put in place a financial education and awareness programme. The information kit for the NPS for general public will help everybody because of the ease of comprehension it offers. We would have a nodal agency, a single point, for grievance redressal. If a complaint is not sorted out within 30 days, one can approach the PFRDA.
Q. What will be the criteria for non-government public to adopt the NPS?
As it is a voluntary scheme, there is no compulsion for anyone to join. All that is sought is compliance for KYC, and a PAN, where required. One can enter the scheme at any age, but can exit only on retirement, which is at 60 years. However, some states have an early retirement age, in which case this age will be considered.
Q. Won’t this make the scheme illiquid?
The objective is to encourage people to save for retirement over the long term. But there are a few exceptions, where we will allow early withdrawals. For instance, for a terminal medical emergency or for purchasing a house for living.
Q. With real-time money transfer, will the contributions be unitised?
Today, under the NPS, the funds are pooled and PFRDA allocates it to fund managers. The returns are also pooled and distributed at the end of the year. The new scheme for the public will follow the unitised format with the NAV declared regularly.
Q. What are the tax provisions for the NPS?
The NPS is the accumulation phase for pension planning. So, 60% of the lump sum on maturity will be taxed at the withdrawal stage. But the annuity part will not be taxed. We have suggested that the entire amount be tax-free in order to have a level playing field.
Q. Is it a losing proposition if one retires when the markets are bad?
There is no compulsion to exit on the date you retire. One can continue to keep the money in the account—or contribute beyond retirement—and wait for the right time to opt out when the value of the contribution is good enough.