AGENDA. 1 Background. Need for Pension Reform. 3 NPS Introduction. 4 Features of NPS. 5 Current status of NPS

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Berenice Sibyl Marshall
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1 Pension Fund Regulatory and Development Authority New Delhi

2 AGENDA 1 Background 2 Need for Pension Reform 3 NPS Introduction 4 Features of NPS 5 Current status of NPS 2

DEMOGRAPHICS Nearly 100 million elderly population (over 60 years age);

Life expectancy of over 18 years at age 60.

A worker will have to save enough to last for nearly 2 decades after he/

3 DEMOGRAPHICS Nearly 100 million elderly population (over 60 years age); expected to be more than double in 25 years. Life expectancy of over 18 years at age 60. This will only improve in future. A worker will have to save enough to last for nearly 2 decades after he/ she stops working. Population Growth Years Population of Aged in Crore 3

20% Civil Servants Large Private Firms Informal Sector At present over 87% workers not having any pension

4 PENSION COVERAGE- HARD FACTS State/ Central Government Employees 2.80% 10.00% Covered under EPFO and other PFs Not Covered under any pension scheme 87.20% Civil Servants Large Private Firms Informal Sector At present over 87% workers not having any pension cover Amongst them some are above poverty line today but likely to slip below it on retirement Traditional family support for old age declining: 60% of households already nuclear 4

5 CENTRAL GOVERNMENT PENSION PAYMENTS , ,478 74, , , , , , (Actuals) (RE) (BE) 5 Amount In Rs. Crore; Source- Economic Survey 2014

6 STATE GOVERNMENT PENSION PAYMENTS ,62, ,43, ,21, ,08, , , , , (RE) (BE) 6 Amount In Rs. Crore; Source- State Finances-A Study of Budgets , RBI, January 2014

7 NEED FOR PENSION REFORM IN INDIA Open ended liability - Rising longevity- 76 million above age 60 years in 2001 which was 55 million in showing a rate of growth of 3.8% per annum in10 years Coverage- 87% of population uncovered under formal pension system Fragmented regulatory framework Lack of individual choice and portability Higher administrative costs impacting the real rate of returns 7

8 TRENDS IN PENSION SECTOR 1. Change of focus from defined benefit to defined contribution 2. Contributions to create dedicated pension wealth through investments in the capital markets in a professional manner 3. Co-contributions by employers during tenure of employment for augmenting pension wealth and reducing employer pension liabilities. 4. Investments are being diversified among various assets like bonds, equity, government securities and fixed income 5. Focus by Regulators on monitoring and developing the pension sector 8

9 PENSION FUNDS RELATIVE TO THE SIZE OF THE ECONOMY IN SELECTED OECD COUNTRIES, 2012 AS A PERCENTAGE OF GDP India s GDP USD 1.83 trillion Pension Assets USD 0.01 trillion 5.46% of GDP Source: OECD Global Pension Statistics. 9

10 PENSION ASSETS UNDER MANAGEMENT United States USD 11.6 trillion (53.4%) United Kingdom USD 2.3 trillion (11%) Japan USD 1.4 trillion (6.7%) Australia USD 1.4 trillion (6.3%) Netherlands USD 1.3 trillion (5.8%) Canada with USD 1.2 trillion (5.5%) Switzerland with USD 0.7 trillion (3.4%) Other remaining 27 OECD countries USD 1.8 trillion 10

11 PENSION REFORM INITIATIVE-NPS (CHRONOLOGY) October 2003, Government of India notification establishing Interim PFRDA as Regulator for Pension Sector. 10 th 22 nd December 2003, Government of India notification introduction of NPS for Central Government Employees joining services w.e.f 1 st Jan 2004 (excluding Armed Forces). From , NPS contributions held in GoI public account at fixed return of 8% April 2008, Transfer of NPS contributions held in the GoI public account to PFRDA for investment by professional fund managers 11

12 CHRONOLOGY OF EVENTS-NPS (CONTD ) May 2009, NPS extended to all citizens of India December 2009, launch of Tier-II account September 2010, launch of NPS-Lite for economically disadvantaged section of society December 2011, launch for Corporate employees September 2013, PFRDA Act passed by both the Houses of Parliament 1 st Feb 2014, Notification of PFRDA Act Jan-May 2015, Notification of Regulations 12 1 st Jun 2015, launch of Atal Pension Yogjna

13 POWERS & FUNCTIONS UNDER THE PFRDA ACT Regulate and ensure orderly growth of NPS and other pension schemes. Registering and regulating intermediaries. Protecting interest of subscribers by ensuring safety of contribution and by ensuring that intermediation and operational costs under NPS are economical and reasonable. Establishing mechanism for redressal of subscriber grievances, educating subscribers, training of intermediaries. Promoting professional organisations connected with pension system, research and projects. Adjudicating of disputes between intermediaries and between intermediaries and subscribers. 13

14 POWERS & FUNCTIONS UNDER THE PFRDA ACT Residuary powers like inspection, conducting inquiries, investigation, audit. Powers of Civil Court for the purpose of examining persons, inspection of books, register etc. Powers of restrain, impounding and retaining proceeds etc. The Authority can appoint Investigating Authority for conducting investigation in case of violation of Act, rules or regulations under Sec 16. Authorised Officer under Sec 17 for inspection, search and seizure and appoint Adjudicating Officer for recommending penalties under Section 28. The Authority can supersede the board of intermediary, appoint administrator or can recommend to Central Government to appoint an Administrator in case of CRA or pension fund 14

15 NPS FEATURES Open for all Indian Citizen, resident or non-resident, aged between18-60 years subject to KYC compliance. Tier-I and Tier-II Accounts for Subscribers Tier-I: Long term investments, restriction on withdrawals, creation of corpus for purchase of an annuity Tier II: Short term investments for easy liquidity UNIQUE PRAN Individual subscriber is allotted a unique Permanent Retirement Account Number. UNBUNDLED ARCHITECTURE Each function is performed by different entity (Intermediary-Role Based) PORTABLE Account can be operated by subscriber across geographies and employment. 15

16 NPS-FEATURES (CONTD ) REGULATED Regulated by PFRDA, defined Investment Guidelines, timelines and regular monitoring by NPS Trust FLEXIBLE Choice of selecting Investment Plans, Fund Manager by employer or subscriber, Point of Presence, Annuity Service Provider and Annuity Plan ONLINE ACCESS Web enabled online access to account and Grievance Redressal. LOW COST Cheapest pension product across the globe. TAX BENEFIT On self contribution as well as employer contribution. IT EXEMPTIONS u/s 10(44) of IT Act, income received by NPS Trust is exempt. NPS Trust is also exempted from the Dividend Distribution Tax and Securities Transaction Tax. 16

17 INCOME TAX BENEFITS Benefit To Employers Contributions made by the employer (upto 10% of Basic + DA) is allowed as a business expense under Section 36 (1) iv (a) of ITax Act. Benefit to Employees Employees own contribution is eligible for tax deduction under sec 80 CCD (1) of ITax Act up to 10% of salary (Basic + DA). This is within the overall ceiling of Rs Lacs under Sec. 80 CCE of the ITax Act. From F.Y , subscriber is allowed tax deduction in addition to the deduction allowed under Sec. 80CCD(1) for additional contribution in his NPS account subject to maximum of Rs. 50,000/- under sec. 80CCD 1(B). Effective Tax benefits in NPS has increased on investments from Rs Lac in FY to Rs Lacs in FY Employee also gets tax deduction for the contribution made by the employer under section 80 CCD (2) of IT act upto 10% of salary (Basic + DA)which is in addition to the tax benefits available under Sec. 80 CCE. 17

18 ISSUES UNDER CONSIDERATION Choice of EPFO or NPS Enabling choice to employees to select EPFO or NPS. EEE Tax Regime NPS compares unfavorably with other long term pension products Regulating other pension schemes Extending the structure to non-regulated Pension schemes Minimum Assured Return Scheme Offering choice of Capital Protection Scheme to subscribers. Retirement Adviser Framing concept paper for registration and thereafter regulations. Online facility for account opening and contribution payment 18

19 NPS ARCHITECTURE National Pension System Central Government State Government Private Sector Corporate Sector NPS Lite / APY PFRDA NPS Trust Central Record Keeping Agency Trustee Bank Pension Funds Custodian Annuity Service Provider PAO / PRAO Directorate/ DDO POP/POP-SP CHO/ CBO Aggregator CG Employee SG Employee Voluntary Subscriber Corporate Subscriber Low income Subscriber

20 NPS ARCHITECTURE Oversight Mechanism 20 PFRDA NPS Trust Fund Flow Trustee Bank Custodian Nodal Office CRA NAV PFM Online Subscriber Annuity Service Providers Information Flow Funds Flow 20

21 NPS INTERMEDIARIES NPS Trust "National Pension System Trust" means the Board of Trustees who hold the assets of subscribers for their benefit Safeguarding the interest of subscribers. Holding the pension scheme assets in its name. Monitoring operational and functional activities of intermediaries Monitoring compliance of guidelines and regulations Audit of intermediaries by Independent Auditors 21

NPS INTERMEDIARIES Central Record Keeping Agency Central Recordkeeping Agency means an agency registered under section 27 to perform the functions of recordkeeping, accounting,

(PRAN) Maintaining database of PRANs issued Recording transactions relating to each subscriber s PRAN.

22 NPS INTERMEDIARIES Central Record Keeping Agency Central Recordkeeping Agency means an agency registered under section 27 to perform the functions of recordkeeping, accounting, administration and customer service for subscribers to schemes; National Securities Depository Limited (NSDL) is the appointed CRA Issuance of Permanent Retirement Account Number (PRAN) Maintaining database of PRANs issued Recording transactions relating to each subscriber s PRAN. Customer service to subscribers and redressal of grievances Issuance of Statement of Transaction Providing operational interface between PFRDA and other intermediaries such as Point of Presence, Pension Funds, Annuity Service Providers, Trustee Bank, Aggregator, Nodal Offices 22

23 NPS INTERMEDIARIES Points of Presence (POP) Point of Presence means an intermediary registered with the Authority under subsection (3) of section 27 as a point of presence and capable of electronic connectivity with the central recordkeeping agency for the purposes of receiving and transmitting funds and instructions and pay out of funds; First point of interface between voluntary subscriber and NPS architecture Services provided to subscriber Subscriber Registration Regular subscriber s contribution Change in subscriber details Change of investment scheme/fund manager 64 entities are functioning as Point of Presence (POP) Processing of withdrawal / exit request Processing of request for subscriber shifting Issuance of printed Account statement 23

Subscriber Registration Regular subscriber s contribution Change in subscriber details Processing of

24 NPS INTERMEDIARIES Aggregator An agency acting as interface for NPS Lite and representing its constituents mass. Provides services to NPS Lite subscriber belonging to economically disadvantaged sections of society Subscriber Registration Regular subscriber s contribution Change in subscriber details Processing of withdrawal request Issuance of printed Account statement 74 entities are functioning as Aggregator for NPS Lite 24

NPS INTERMEDIARIES Pension Fund Managers (PFM) Pension Fund means an intermediary which has been granted a certificate of registration under sub-section (3) of section 27 by the Authority as a

25 NPS INTERMEDIARIES Pension Fund Managers (PFM) Pension Fund means an intermediary which has been granted a certificate of registration under sub-section (3) of section 27 by the Authority as a pension fund for receiving contributions, accumulating them and making payments to the subscriber in the manner as may be specified by regulations; Manages the scheme portfolio and performs investment management functions. Invests strictly in accordance with the PFRDA investment guidelines and not to invest directly or indirectly outside India. Fund accounting of schemes. Provides daily NAV of schemes to CRA for allotment of units against contributions made by subscribers. Foreign shareholding restricted to 49% or such limits applicable under the Insurance Act PENSION FUNDS appointed by PFRDA 1. SBI Pension Funds Limited 2. UTI Retirement Solutions Limited 3. LIC Pension Fund Private Limited 4. ICICI Prudential Pension Funds Management Company Limited 5. Kotak Mahindra Pension Fund Limited 6. Reliance Capital Pension Fund Limited 7. HDFC Pension Management Company Limited. 8. Birla Sunlife Insurance Company Limited (yet to start operations) 25

26 NPS INTERMEDIARIES Trustee Bank (TB) Trustee Bank" means a banking company as defined in the Banking Regulation Act, Currently, Axis Bank Ltd. Is functioning as the Trustee Bank. Receiving contributions collected by /Nodal Office/ POP/SP/Aggregator. Pooling of Funds, Identification of remittances received and providing Fund Receipt Confirmation to CRA Remittance of funds to Pension Funds for investments Fund Reconciliation with CRA 26

Reconciliation of security holdings with Pension Funds.

27 NPS INTERMEDIARIES Custodian Providing Depository and Custodial services in compliance with SEBI Custodial Regulations 1996 Processing and Settlement of investment transactions undertaken by Pension Funds. Reconciliation of security holdings with Pension Funds. Maintaining records of securities and safe keeping of securities. Collection of coupons and corporate actions Stock Holding Corporation of India (SCHIL) has been appointed as NPS Custodian 27

28 NPS INTERMEDIARIES Annuity Service Provider (ASP) Only IRDA registered life insurers can act as Annuity Service Providers. Responsible for providing a regular annuity (monthly pension) purchased by the subscriber from the accumulated NPS corpus. The empanelled as ASPs are LIC, SBI Life, ICICI Prudential, Bajaj Allianz Life, Star Union Dai-ichi Life, Reliance Life and HDFC Standard Life. Subscriber will have the choice of various types of annuities schemes offered by the Annuity Service Provider. 28

29 NPS SCHEMES Scheme for Central and State Government Employees Pattern of investment guided by GoI directives for non-government provident funds, superannuation funds, and gratuity funds Scheme for all citizens and corporate employees Asset Class E (equity market instruments) subject to a maximum of 50% Asset Class C (fixed income instruments) Asset Class G ( government securities) Scheme for weaker sections of society NPS Lite with Swavalamban benefit Government of India Social Security Pension Scheme Atal Pension Yogjna 29

30 DEFAULT SCHEME - LIFE CYCLE FUND Age Asset Class E Asset Class C Asset Class G Up to 35 years 50% 30% 20% 36 years 48% 29% 23% 37 years 46% 28% 26% 38 years 44% 27% 29% 39 years 42% 26% 32% 40 years 40% 25% 35% 41 years 38% 24% 38% 42 years 36% 23% 41% 43 years 34% 22% 44% 44 years 32% 21% 47% 45 years 30% 20% 50% 46 years 28% 19% 53% 47 years 26% 18% 56% 48 years 24% 17% 59% 49 years 22% 16% 62% 50 years 20% 15% 65% 51 years 18% 14% 68% 52 years 16% 13% 71% 53 years 14% 12% 74% 54 years 12% 11% 77% 55 years 10% 10% 80% 30

31 CONTRIBUTIONS TO NPS Central and State Government employee contributes 10% of salary (Basic+DA) plus equal co-contribution by employer Contributions Tier I Tier II NPS Lite APY Minimum at account opening Rs. 500 Rs Rs Minimum amount per contribution Rs. 500 Rs. 250 Rs Minimum total in the year Rs Minimum frequency of contributions 1 per year Rs balance 1 per year - 12 contribu tions - Monthly 31

32 CHARGE STRUCTURE Intermediary Charge head Service Charges* Private Govt. Lite/APY Method of Deduction CRA PRA Opening charges Rs. 50 Rs. 50* Rs 35 Through Annual PRA Maintenance cost per account Rs. 190 Rs. 190* Rs 70 Charge per transaction Rs. 4 Rs. 4* 12 free cancellation of units * Paid by Govt POP Initial subscriber registration and contribution upload Any subsequent transactions Rs. 125 NA NA 0.25% of contribution, Min. Rs 20 Max. Rs NA NA To be collected upfront Trustee Bank NIL NA Custodian Asset Servicing charges % p.a for Electronic segment & 0.05% p.a. for Physical segment PF charges Investment Management Fee 0.01% p.a % p.a % p.a Adjusted in NAV 32 Adjusted in NAV

33 EXIT FROM NPS Criteria At any point in time before 60 years of Age (min. contribution for 10 years) On attaining the Age of 60 years and up to 70 years of age Death due to any cause (all citizen) Benefit Minimum 80% of the pension wealth to be utilised for purchasing a life annuity from the empanelled ASP. Remaining 20% of the pension wealth can be withdrawn as lump sum. If pension wealth is equal or less than Rs 1 lakh, entire amount will be paid as lump sum. Minimum 40% of the pension wealth to be utilised for purchasing a life annuity from the empanelled ASP, subject to maximum deferment of 3 years. Remaining 60% of the pension wealth can be withdrawn as lump sum or can be deferred and withdrawn anytime before 70 years. Subscriber can also contribute till withdrawal or 70. If pension wealth is equal or less than Rs 2 lakhs, entire amount will be paid as lump sum. In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS pension wealth in lump 33 sum. However, if the nominee wishes to continue with the NPS, he/she shall have to subscribe to NPS individually after following due KYC procedure.

34 PARTIAL WITHDRAWALS FROM NPS Partial Withdrawals - 25% of own contributions can be withdrawn subject to fulfillment of conditions:- Purpose o Higher education of children o Marriage of children o Purchase or construction of house o Treatment of specified illness After atleast 10 years from the date of joining NPS Maximum 3 withdrawals subject to a gap of atleast 3 years between withdrawals (not applicable for illness) 34

35 CURRENT STATUS- NPS Sector Number of Subscribers AUM (Rs Crores) Central Government 15,38,241 38, State Government 26,80,677 39, Private Sector 4,80,506 6, NPS Lite 44,69,300 1, Total 91,68,724 86, *Data as of 29 th May State Governments and all UTs has adopted NPS for their employees 1713 corporate registered in NPS 64 entities including Public Sector & Private Sector Banks acting as Point of Presence under NPS (around POP-SPs) 35

36 NPS CORPUS COMPOSITION 0.43% 10.03% 0.68% 2.56% Govt.Securities State Dev. Loan 33.25% 49.49% Corporate Bond Equity Money Market Fixed Deposit Current Assets 3.56% 36

37 SCOPE FOR CHARTERED ACCOUNTANTS Audit of Intermediaries Process Audit for PoP, Aggregator, Trustee Bank, CRA and Custodian Regulatory Compliance of Regulations, Guidelines, Circulars issued by PFRDA for intermediaries Scheme Accounting Audit for PFs Strategic services to PFs, Corporates and other stakeholders of NPS in creating business plans, Business strategy, Capital restructuring, MIS and Regulation compliance requirements. Developing Internal Audit process controls for NPS intermediaries and assist intermediaries in Financial reconciliation. 37

38 SCOPE FOR CHARTERED ACCOUNTANTS Apart from the Accounting and Audit roles, can contribute to the development of NPS by Strengthening Corporate Governance of intermediaries Advising intermediaries on Risk Management Designing customized/tailored pension products specific to an industry Advising Pension Funds on the pension portfolio such as management of funds, mix of alternatives etc Promoting the Scheme by advising clients on retirement planning, benefit calculations, taxation, mix of investment schemes, returns analysis etc 38

39 THANK YOU 39

Pension Fund Regulatory and Development Authority. B-14/A, Chatrapati Shivaji Bhawan, Qutab Institutional Area, Katwaria Sarai, New Delhi

Pension Fund Regulatory and Development Authority B-14/A, Chatrapati Shivaji Bhawan, Qutab Institutional Area, Katwaria Sarai, New Delhi-110016 1 NPS Eligibility & Benefits of NPS Stakeholders under NPS