Fixed Medical Allowances to beneficiaries of NPS drawing additional relief on death/disability of goverenment servant

Income of NPS Trust to be exempt from income tax; also from DDT and STT

Shri Pranab Mukherjee, Minister of Finance in his Budget Speech informed the Lok Sabha today that he proposes to exempt the income of New Pension System (NPS) Trust from the income tax and any dividend paid to this Trust from Dividend Distribution Tax (DDT). Similarly, all purchases sales of equity shares and derivatives by the NPS Trust will also be exempt from this Securities Transaction Tax (STT), he added.

The Finance Minister further proposed to enable self employed persons to participate in the NPS and avail of the tax benefits available thereto. Underlining that NPS will continue to be subjected to the Exempt-Exempt-Taxed (EET) method of tax treatment of savings, Shri Mukherjee said that it is proposed to provide necessary fiscal support to the NPS for the establishment this much needed social security system.

“The New Pension System is an important milestone in the development of a sustainable, efficient, voluntary and defined pension system in India”, Shri Mukherjee emphasized.

GoI Clarification on new pension scheme dt 25/02/2009

Additional relief on death/ disability of Government servants covered by the NPS

Govt staff earn 14.82% on NPS

Central government employees who joined as a part of the contributory New Pension Scheme (NPS) have earned a weighted average return of 14.82 per cent during 2008-09, the first year when three fund managers managed a corpus of around Rs 2,000 crore.

This is in contrast to the annual 8 per cent returns between January 2004 and March 2008 when the government had not transferred the money to the three fund managers – SBI Pension Fund, UTI Retirement Solutions and LIC Pension Fund.

The Centre moved all employees joining from January 1, 2004 to NPS, where they have to chip in with a contribution of 10 per cent of their basic salary with a matching contribution made by the government. While the money was being deducted, it was parked in a government account and earned a fixed rate of return.

Last year, based on the financial bids, the government allocated 55 per cent to SBI, which earned 16 per cent on the corpus managed by it, followed by UTI, which earned a return of around 13 per cent on 40 per cent of the corpus and LIC, which generated returns of around 12 per cent on the remaining corpus. Last week, the allocation was changed based on last year’s performance (see table).

While the corpus will increase this year, partly due to higher contribution and also due to the release of some of the arrears following the implementation of the Sixth Pay Commission’s recommendations, the equity investment is also expected to go up.

At present, around 5 per cent of the corpus is invested in equities against the permissible limit of 15 per cent.

“Initially, fund managers were slow on investment in equities and invested significant amounts in bank deposits. But now, they will step up equity investment, also because the overall environment has improved,” said a source associated with the asset allocation.

This year onwards, the fund management fee is also going to decrease to 0.0009 per cent (or 0.09 basis points), in line with the pension scheme for non-government employees, as against up to 5 basis points last year.

In addition, state governments are expected to join the scheme. While 21 states have shown their willingness to join NPS, none of them have started releasing the funds as some of them, unlike the Centre, are reluctant to bear the costs, such as those related to the record-keeping agency.

courtesy: Business Standard

Things investors need to know about New Pension Schemes

New Pension Schemes (NPS) are in news for quite some time now. With India finally gearing up to have its own government-regulated pension plan, on the lines of the ‘401K-retirement plan’ in the US, the excitement hovering around NPS is obvious.

While the scheme is already operational for central govt employees, its opening for general public on May 1, 2009. Unlike the traditional retirement solutions, such as PPF and EPF; NPS is not a defined benefit, but rather a defined contribution plan. Thus, while investment in PPF and EPF attract a fixed rate of interest, returns from NPS will be market determined.

The market here, however, is not confined to equity alone, but includes corporate bonds and government securities. Investment in these papers is to be actively managed by fund managers. Pension Fund Regulatory and Development Authority (PFRDA) have designated six asset management companies (AMCs) for the purpose.

So, does it imply that NPS is just another mutual fund scheme?

Though the NPS will be managed by fund houses, the autonomy lies with the PFRDA. While AMCs take investment decisions for NPS, their operational freedom shall be confined to the guidelines issued by PFRDA from time to time. Again, while an MF investor can enter and exit an scheme at free will, NPS will bind them till the retirement age of 58 years. The current guidelines do not permit a pre-mature withdrawal or any loan against the investment in NPS.

The onus of deciding the structure of investments and selecting the fund house has, however, been left to the investor. The investor is free to choose the right mix of equity (E), corporate bonds (C) and government securities (G) in his/her portfolio. Alternatively, investor can choose auto option, wherein his investment in NPS will divided in pre-determined proportion of 15% (E), 45% (C) and 40% (G). In the case of automatic allocation, the entire investment will be equally distributed among all six fund managers in the first year. From second year onwards, however, the allocation will be pro-rated on the basis of the first year’s performance.

NPS can also be distinguished from an MF scheme in terms of its cost structure. While an MF scheme charges an entry-load of about 2.25% and an average management charge of 1.5%, NPS carries a bare minimum fee of 0.0009%. Virtually free; as one might put it! But hold on. For, while NPS may prima facie appear an art of charity, investors would do well to note that there is never a free lunch.

NPS requires maintenance of all records and the same will be done by NSDL, which will act as the central record keeping agency (CAR). Each investor will thus be required to pay NSDL an account opening charge of Rs 50. Besides, there will be a maintenance charge of Rs 350 per year and an additional charge of Rs 10 per transaction.

PFRDA has also appointed selected banks as point of presence (POPs) to facilitate quick and hassle-free transactions. However, these services are not free either. According to an industry source, POPs will also charge an investor an account opening fee of Rs 20 and an additional charge of Rs 20 per transaction. This implies that an investor seeking to invest Rs 500 per month will actually end up paying around Rs 560 per month. That’s nearly 11% transaction cost, considerably higher than 8% return offered by PPF.

So does this render NPS more costly visà-vis an MF scheme?

The current cost structure of NPS is as good as fixed in nature, while that of an MF is a percentage of investment. Thus, the higher the investment, the higher would be the charges in case of an MF scheme (See Table). Given the current cost structure, NPS appears to be more beneficial to those with a higher amount of periodic investment.

Another factor that needs major consideration is the tax treatment. NPS does not enjoy any tax benefits, either at the investment stage or at the time of maturity. This makes it less attractive vis-à-vis other retirement plans available in the market. While PFRDA is understood to have approached the government to grant NPS the tax status of (exempt-exempt-exempt) EEE, the fact that PFRDA bill is yet to be approved by Parliament may procrastinate the process. Thus, while the step in the right direction has been taken, a lot needs to be done to make NPS as competitive as 401K.
Courtesy : TOI

Central Recordkeeping Agency (CRA) & New Pension Scheme

National Securities Depository Limited (NSDL) and The Pension Fund Regulatory and Development Authority (PFRDA) have entered into a formal agreement on November 26, 2007 relating to the setting up of a Central Recordkeeping Agency (CRA) for the New Pension System NPS). The NPS was introduced by Government of India for its new recruits (except the Armed Forces) w.e.f. January 1, 2004.

The CRA is a first of its kind venture in India and is critical to the successful operationalization of the NPS. The main functions and responsibilities of the CRA include:

i. Recordkeeping,Administration and customer service functions for all subscribers of the NPS.

ii. Issue of unique Permanent Retirement Account Number (PRAN) to each subscriber, maintaining a database of all PRANs issued and recording transactions relating to each subscriber's PRAN.

iii. Acting as an operational interface between PFRDA and other NPS intermediaries such as Pension Funds, Annuity Service Providers, Trustee Bank etc.

CRA will monitor member contributions and instructions and transmit the information to the relevant Pension Fund and schemes on a daily basis. CRA will provide periodic, consolidated PRAN statements to each member and discharge such other duties and functions as may be determined by the guidelines, directions and regulations issued by the PFRDA from time to time.

CRA is also providing electronic interconnectivity to the PFRDA, other service providers (like banks, post offices and depository participants, among others), pension funds and annuity providers.

PFRDA

Pension Fund Regulatory and Development Authority (PFRDA) is an independent body established by the Government of India on 10^th October 2003. PFRDA is the Regulator for the New Pension System (NPS) and its regulatory responsibilities include regulating charges, entry and exit, quality and provision of services of NPSCAN, CRA, PFMs, Trustee Bank, Contracting with other service providers under NPS, Conducting systems Audit and other routine audits etc.

Link: www.pfrda.org.in

PFMs

Pension Fund Managers are appointed by PFRDA to maintain the Pension contribution of all subscribers through various schemes offered by PFM. Subscribers will have the option to invest their contributions into one or more schemes of the PFMs. The PFMs will responsible for providing the Net Asset Value of the Schemes offered to the CRA. PFMs will allot units based on NAV as applicable.

Link:

ASP

Annuity Service Providers (ASPs) are be appointed by PFRDA to maintain the annuity contribution of subscribers through their various schemes. Subscribers will have the option to invest their amount into one or more annuity schemes upon retirement/resignation. ASPs would be responsible for delivering a regular monthly pension (annuity) to the subscriber for the rest of his/her life.

YET TO BE APPOINTED

Trustee Bank

NPS Trust formed by PFRDA would be responsible for taking care of the funds under the NPS. The Trust would hold an account with the Trustee Bank appointed by PFRDA.The Trustee Bank upon receiving credits from Nodal offices would transmit the information to CRA for reconciliation.The Trustee Bank shall remit fund to the entities viz. PFMs, ASPs and subscribers on receipt of instructions from CRA.

Link:correspondent branches

Link:mapped list

CRA Facilitation Center

CRA-FC is the entity appointed by NSDL to extend various services under NPS, to its users across the country. The entities who have been appointed as CRA-FC shall establish multiple branches across the country to provide services to the nodal offices such as Pay & Accounts Office (PAO) or equivalent office under Central and State Government.
As per present scope of CRA, following services shal l be offered by the CRA-FC
a. Acceptance of Application for allotment of new PRAN
b. Acceptance of Subscriber request for change in signa ture and/or change in photograph.

CRA-FC Locations (for State Government)

New govt staff to get family, disability pension: Govt

23 Feb 2009, 2232 hrs IST, PTI NEW DELHI:
The government on Monday approved temporary measures to provide benefits like family and disability pension to staff recruited after January 1, 2004.

"The Cabinet has decided that on a provisional basis existing rules in respect of these special pensionary benefits, which apply to government servants prior to January 1, 2004 will also apply to those recruited after that date", Home Minister P Chidambaram told reporters after the meeting.

The government employees, except defence personnel, who have joined the service after January 1, 2004 are covered by the defined pension scheme which does not address situations like dying in harness, indirect pension, family pension and disability pension, the Minister said.

Pending report by the high level task force looking into the issue and formulation of new rules, the temporary provisions would continue, he said.

India’s new pension system redefines scale

By Jame DiBiasio | 16 February 2009

India is poised to launch an innovative pension system on an unprecedented scale. After many years of languishing in bureaucratic limbo, the so-called New Pension System (NPS) is now set to go live on April 1, having just completed an eight-week flurry of activity to establish operational procedures and select fund managers.

The NPS is aimed at catering to the nearly 400 million people in India's 'unorganised' sector of small- to medium-sized enterprises and cottage industries.

It originated as a scheme for central government employees, with the intention of expanding to the private unorganised sector. Last year the Pension Fund and Retirement Development Authority (PFRDA), the system's regulator, handed out three mandates for this role, to three government-owned fund managers, LIC Mutual Fund, State Bank of India Asset Management and UTI, based on recommendations forwarded by Crisil, a local ratings agency. These mandates are mainly fixed income; they allow the managers to invest up to 15% in equities but so far none has come close to that cap.

Because the NPS is only mandatory for newly joining civil servants, the size outsourced to these three managers is modest, and they will be paid 3-5bps on managed assets.

September saw another opening of the pensions world, when the Employee Provident Funds Office, which manages around $25 billion on behalf of the organised sector (the larger corporations), for the first time outsourced assets to four fund houses: HSBC Asset Management, ICICI Prudential Asset Management, Reliance Capital and SBI. Collectively these houses will receive $2-3 billion annually to run domestic bond portfolios.

But the biggest, most anticipated move has been the extension of the NPS from just covering new civil servants to the entirety of the unorganised sector. This had been held up for years because the Marxist parties that had provided the ruling Congress Party with support in parliament had opposed this. But in September the Marxists broke the alliance over India's nuclear deal with the United States, and Congress was able to reassemble a new ruling coalition with other parties.

With a general election scheduled for this spring, the PFRDA's chairman D. Swarup realised he had a short window of opportunity to get the NPS expansion through parliament and into action. The PFRDA appointed Mercer to assist it with designing the plan for the unorganised sector in December and unveiled the results this month.

The designers appear to have come up with a truly innovative design that is intended to maximise benefits to members, rather than enrich product providers. The 'new' NPS is structured around three tiers. First is the Central Recordkeeping Agency (CRA), which manages the system and is responsible for collecting contributions and disbursing benefits.

Beneath this is a myriad of Points of Presence (PoPs), in other words, distributors. Although entities such as the post office were considered, the designers for now have opted to stick with commercial banks and life insurance companies. An additional level of independent financial advisors has likewise been scrapped over concerns about their ability to understand or sell the NPS. So for now, the PoPs -- mainly the state-owned banks -- will serve as the front line.

The CRA is now in the process of finalising its choice of external fund managers who will handle all assets for members from the unorganised sector. It has made offers to six providers for three-year contracts, and it is assumed these six will accept, although negotiations are not over. The six include three government-owned entities (ICICI Life Insurance, SBI and UTI) and three private players (IDFC Asset Management, Kotak Asset Management and Reliance Capital). By law managers to the system cannot have more than 26% foreign ownership, which has automatically excluded foreign players such as Franklin Templeton and HSBC Asset Management, and most joint ventures as well.

These will manage two portfolios of indexed equities, two of fixed income, and two of corporate bonds and other credit instruments -- all domestic, for now. These will serve as building blocks to which members can allocate any mix of assets. (Government employees in NPS will also be able to choose from among these six managers, in addition to the three balanced mandates already chosen for them; but not vice versa, i.e. private-sector workers will not have access to portfolios chosen explicitly for civil servants.)

One of the most progressive features of the NPS is its default option for anyone who doesn't want to pick among funds, which is a lifecycle option. The CRA will allocate on member's behalf among the six funds, with an equities component ranging from 80% to 10%, adjusting accounts each year by the member's age.

If the scale of the unorganised sector is vast, consider the flip side: the razor-thin fees on offer. UTI put in the lowest bid, at 0.09 basis points -- yes, that's nine-hundredths of a basis point, and it includes transaction and custody costs. The CRA is now locking down the same fee among the other five managers. (In the cash market, an equity index fund sells for 100bps, and an actively managed fund for 200bps.)

"This cost structure is as close to a true index as you can get," says Hansi Mehrotra, Mumbai-based principal and business leader for investment consulting at Mercer.

For these fund managers, the eventual promise of servicing the vast unorganised sector is worth writing off the next three years. They already charge tiny fees for regular saving plans to their mutual funds. They have the existing IT, management and other resources already in place. Because the equity funds are passive, there is little call on portfolio managers.

And the biggest expense in asset management, the marketing, has been taken out of fund managers' hands. The PFRDA insisted on the CRA being responsible for all marketing efforts, in order to defend against mis-selling.

The PFRDA is also concerned about mis-selling at the PoP level. There is nothing to prevent an adviser at, say, State Bank of India from suggesting a member put all of their contributions into the fund run by SBI Asset Management. But at least it must obtain a signature from each member.

The biggest challenge will be making people aware of the NPS, and convincing them to contribute. Although mandatory for new civil servants, it is voluntary for private-sector workers. The CRA will begin marketing on April 1, once the system goes live, but it lacks a mechanism to reach the hundreds of millions who are eligible. The banks that will serve as PoPs don't have incentives to push the system, when it comes at the expense of their own deposit bases -- and besides, some 20% of these workers don't even have a bank account.

One big weakness in the system is the lack of tax incentives. Although plenty of workers in the unorganised sector pay no taxes, there could be rebates on things like excise taxes or custom duties, as well as corporate and income-tax breaks for those who qualify.

A second flaw is the requirement that nearly half the accumulated assets are to be used to buy an annuity from life insurance companies upon retirement. Although the annuity concept is good, doing so in this manner will subject members to the high prices of the cash market, undermining the benefits of ultra-low cost that the NPS's scale is meant to deliver.

There is now a bill in parliament that would address the tax issues, separate to the launch of the system, but fund management executives in Mumbai are sceptical it will be passed before the elections -- which means it is unlikely to be passed. Getting the NPS off the ground at all is a success and a coup for D. Swarup, but the system will require plenty of further reform.

The PFRDA says the system will attract only $2 billion per annum as a result of these problems -- a disappointment to fund executives, who had previously expected five or six times that amount. It will take fund houses 10 years or more to break even, says one funds exec, although the cutthroat fee schedules may be renegotiated in three years.

© Haymarket Media Limited. All rights reserved.

Salient features of New Pension Scheme

Pension reforms off the blocks, proposals called for six funds

The pension regulator today set the stage for opening the business for non-government employees from April by seeking proposals for setting up six pension funds.
Among the host of conditions specified in the Primary Information Memorandum and Expression of Interest (EOI) package, the Pension Fund Regulatory & Development Authority (PFRDA) intends to allow up to 26 per cent foreign investment but with the rider that the direct or indirect holding should not exceed 26 per cent.

The stipulation is akin to the foreign investment regime in the insurance sector, in which the regulator had also initially decided to factor in the indirect holding in the firm. Over the years, however, the norms were relaxed and the indirect holding is not counted in the 26 per cent ceiling for the sector.

The move from PFRDA is the latest in a series of financial sector reforms that the United Progressive Alliance government has managed to push through after the Left parties withdrew the support they extended in Parliament in June following disagreements over the Indo-US civil nuclear agreement.

Earlier this week, the government introduced a Bill to amend the insurance laws, which among other things, proposes to raise the foreign investment ceiling to 49 per cent.

If Parliament approves the insurance Bill, the foreign investment ceiling for the pension sector will also go up. A Bill to provide statutory backing to PFRDA is pending in Parliament but could not be approved owing to opposition from the Left parties. For the time being, however, PFRDA has proposed that the pension fund managers will sign an investment management agreement (IMA) with the board of the New Pension Scheme (NPS Trust).

The fund managers will be required to invest in line with the norms prescribed with a default option that is to be decided. The default option will come into play if an investor is unable to decide whether to invest in a balanced, growth or debt scheme. The investor will have the option of changing schemes periodically.

ELIGIBILITY CRITERIA FOR FUND MANAGERS
* A new company has to be floated, which will get a ‘certificate of commencement of business’ from PFRDA
* At least 5 years experience of fund management
* Monthly average assets under management not less than Rs 8,000 crore for the last 12 months
* Direct and indirect foreign investment not more than 26%
* Net worth of Rs 10 crore
* Sponsor will not hold more than 10% of equity in any other pension fund
* Sponsor will not hold more than 10% of equity in central record keeping agency under NPS
* Sponsor will not hold more than 5% of equity stake in NPS Custodian
* 50% independent directors

Central or state public sector companies or entities regulated by the Reserve Bank of India, Securities & Exchange Board of India or Insurance Regulatory and Development Authority are eligible to bid to be sponsors of a pension fund.

While 14 mutual fund houses had average assets under management of over Rs 8,000 at the end of November 2008, most insurance companies meet the eligibility norms by virtue of having a foreign joint venture partner. Most banks are also eligible to bid.

In addition, the three fund managers – State Bank of India, UTI and Life Insurance Corporation – that already manage the pension contribution of central and state government employees who joined from January 2004, will also be eligible to manage non-government business but will have to segregate the operations.

The last date for submitting the expression of interest is January 9, sources said, and PFRDA intends to appoint the fund managers by the first week of February. In addition, it is expected to start the process of appointment of point of presence, where subscribers can deposit their funds, over the next week to 10 days. To ensure that cross-holding does not lead to conflict of interest, PFRDA has decided to restrict a sponsor’s holding in another fund and National Securities Depository Ltd (NSDL) the central record-keeping agency. In addition, the pension fund cannot hold over 5 per cent stake in the NPS custodian, Stock Holding Corporation.

BS Reporter / Mumbai December 27, 2008, 0:18 IST

Bids soon to man individual pension accounts

NEW DELHI: The regulator for the new pension scheme would soon invite bids from private sector fund managers to handle parts of its Rs 1,700-crore corpus, which theregulator expects to more than double in some time.
Insurance companies such as Tata AIG and MetLife India Insurance Co, which are partly owned by foreign investors, can also participate in the Fund management of the new pension scheme administered by the Pension Fund Regulatory Development Authority (PFRDA), an official with the regulator said.
The appointment of private fund managers comes ahead of the regulator’s plan to extend the scheme to private individuals from April 1, 2009. Now, participation in the scheme is compulsory for employees who joined government service after January 1, 2004, and voluntary for those who are in public service.
Competition among fund managers would give contributors the option to choose from different investment schemes and the opportunity to switch from one scheme to another depending on the returns. “Many foreign insurance entities have joint ventures in the country. They could sponsor pension schemes by setting up dedicated arms for that. Their eligibility criteria would be the same as that of other fund managers,” an official told ET. Entities managing Rs 10,000 crore and with five-year experience are eligible. Today, SBI, UTI Asset Management Co and LIC are managing the corpus of the scheme.
PFRDA would first invite expressions of interest, evaluate them as per technical parameters, and then invite commercial bids.
While the pension regulator will keep the total number of fund managers limited, it would appoint unlimited number of entities for soliciting and collecting contributions from individuals.
These could be banks, post offices or other entities with a large reach and ability to transfer funds electronically. “We have 1,50,000 post offices in the country, but only 10,000-15,000 have electronic connectivity with other centres. We need agents that can instantly transfer funds electronically. Otherwise contributors’ savings would remain blocked at various levels, causing them losses,” said the official.
The regulator is framing investment guidelines for the fund managers to safely deploy private individuals’ savings and to give them decent returns depending upon their risk appetite. Only 15% of government employees’ savings will go to the stock market

.
Courtesy : The Economic times

Default Option could be on PFRDA's radar: Swarup

Mumbai, Nov 19 (PTI) Pension Fund Regulator PFRDA is considering a fifth option for investment of contribution made by government employees under the new pension scheme.
Called Default Option, it is a life-cycle fund under which the amount of money invested in equity would be more in the initial stages while in the later stages, more money would be invested in debt instruments.

"We are considering the Default Option which is a life-cycle fund. The Deepak Parekh committee which is looking at various investment plans for pension scheme is also considering this option. The committee is expected to submit the report by November 30," Pension Fund Regulatory and Development Authority (PFRDA) Chairman D Swarup told PTI.

"Once recommended PFRDA will take a view on it. It could be one of the options," he said.

The Default Option, which is more balanced, provides a return which is much more than the option where money is invested wholly in debt instruments but certainly gives less returns than high-risk fully equity-based investments.

"Default Option has become a global trend. It is a future pension plan. In a country like India where financial literacy is very low and there is an inability to sense future risks, Default Option will be an appropriate option," LIC Pension Fund Chief Executive Officer, H Sadhak, said. PTI