PENSION FUNDS & NATIONAL PENSION SCHEME

In this article, we will know about Pension Funds and National Pension Scheme from the subject Law & Ethics chapter-13 Industrial Laws of CMA Inter.

What is a Pension Fund?

It is a fund established by an employer to facilitate and organize the investment for employees’ retirement funds which is contributed by both employer and employees. Pensions are investment pools that pay for an employee’s retirement commitments. Funds are paid by either employee or employers or both. Corporations and all levels of government provide pensions. The fund managers invest these contributions conservatively. The pension fund is a common asset pool that aims to generate stable growth over a long period and provide pensions to employees when they reach the end of their working tenure and commence their retirement. Pension plans provide financial security and stability during their old age.

Intermediaries:-

Trustee Bank

It is a bank and an intermediary which is responsible for the day-to-day flow of funds, and also provides banking facilities, receives NPS funds from all nodal offices, and transfers the same to intermediaries such as pension fund/annuity service provider/other intermediaries as per operational guidelines. Axis Bank has been appointed as Trustee Bank from 1 July 2015 and the appointment is valid for 5 years subject to annual review by PFRDA. This is also one of the intermediaries of PFRDA. Following are the tasks that the agency performs-

1. Receives funds for NPS from all over the country via zonal and regional offices.
2. Verifies amounts paid by the zonal offices.
3. Fund transfers with discrepancy are returned to zonal office or bank involved and correct transfers are sought.
4. Prepares Fund Receipt Information by consolidating all funds received for NPS.
5. Transfer funds according to instructions by CRA for settlement of funds for various entities.
6. Reconcile daily balances by CRA.
7. Maintain records of contributions by nodal offices and other documents about the same.

Custodian

Custodian is responsible for the safe-keeping of securities or assets held under NPS or any other pension scheme and providing incidental services including maintaining accounts of securities or assets, undertaking activities as a Domestic Depository, collecting the benefits or rights accruing on the securities or assets, etc. Stock Holding Corporation of India Limited is the custodian appointed by PFRDA.

• It does the job of maintaining accounts of securities and assets held by customers.
• It collects accrued benefits on securities and assets.
• It acts as a Domestic Depository and performs functions related to the same.
• It informs about the actions that are to be taken or have been taken by the issuer of securities.
• It maintains and reconciles records of services.

Nodal offices

Nodal offices are one of the important links in the spread and reach of NPS schemes. These are the numerous links that join up to make the robust PFRDA.

• Central Government’s nodal offices perform the task of interacting with CRA on behalf of customers for NPS.
• State Government’s Nodal Offices too, perform the same task but under a smaller node.

Aggregators

An aggregator can be understood as the most prominent and first point of contact between the subscriber and the NPS – Swavalamban.

• It is responsible for carrying out changes in any of the KYC information as requested by a subscriber. This includes a change in the name, address, contact information, etc.
• It also handles grievances in case where subscriber raises a complaint or grievance against any of the intermediaries of the PFRDA.

Apart from the above-listed intermediaries, banks that are both public and private ones are also responsible to a certain extent for popularizing and opening of NPS Accounts of subscribers in the country. The main aim of the government behind running the Pension fund regulatory and development authority (PFRDA) and subsequent NPS schemes is to make sure that citizens have a certain pension fund to fall back on when they retire from their jobs (government or private).

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Annuity Service Provider (ASP)

ASPs are entrusted with the task of providing annuity payments to subscribers at the time of exit/periodic annuity payment depending on the annuity contract opted by subscribers, addressing queries of potential subscribers with respect to purchase of annuities, facilitate subscriber registration for purchase of annuity, grievance redressal of subscribers who purchased annuity from it, etc.

Retirement Advisor

Retirement adviser can be any person i.e., individual / firm / company / trust / society, etc. registered under the PFRDA to provide advice on NPS or other pension schemes regulated by the authority of subscribers or other persons or group of persons.

NATIONAL PENSION SCHEME (NPS)

NPS is a defined as a voluntary contribution pension system introduced by the Central Government with effect from 1st January 2004, (except for armed forces), whereby subscribers’ contributions are collected and accumulated in an individual pension account using various intermediaries. Under NPS, individual contributions are pooled together into a pension fund and are invested as per approved investment guidelines. Funds are generally invested in diversified portfolios consist of government bonds, bills, corporate debentures, and shares, based on subscriber’s choice. Subscribers also have an option, at the time of exit, to purchase a life annuity by using accumulated pension funds. NPS is governed by the Pension Fund Regulatory and Development Authority. PFRDA also established an NPS trust under the Indian Trust Act, 1882 to manage assets and funds under NPS in the best interest of subscribers. NPS Trust is managed by a Board of Trustees appointed by PFRDA who is the settlor of the trust. Legal ownership of trust and funds is entrusted to the board of trustees. It extends to all citizens of India, including workers of the unorganized sector voluntarily, with effect from 1 May 2009. On 29 October 2015, the Reserve Bank of India allowed Non-Resident Indians (NRI) to subscribe to NPS.

ADVANTAGES IN JOINING NPS

• Flexibility – NPS offers a range of investment options and choice of Pension Fund Managers (PFMs) for planning the growth of your investments reasonably. Individuals can switch over from one investment option to another or from one fund manager to another subject, of course, to certain regulatory restrictions. The returns being market-related.

• Simple – Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. The scheme is structured into two tiers:

1. Tier-I account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.

2. Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.

• Portable- NPS provides seamless portability across jobs and locations, unlike all current pension plans, including that of the EPFO. It would provide a hassle-free arrangement for individual subscribers.

• Regulated- NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust.

Conclusion

The New Pension System reflects the government’s effort to find sustainable solutions to the problem of providing adequate retirement income. The NPS has been designed to enable the subscriber to make optimum decisions regarding his/her future and provide for his/her old age through systematic savings from the day he/she starts his/her employment. PFRDA’s efforts are an important milestone in the development of a sustainable and efficient voluntary defined contribution based pension system in India. PFRDA, the regulator for NPS is responsible for the registration of various intermediaries in the system such as CRA, custodian, NPS trustee bank, etc. It shall also monitor the performance of various intermediaries. It will also regulate how subscriber’s contributions are invested by PFs and how to make efforts to ensure fair play for subscribers.

Now check your understanding about the topic by answering the following questions:-

1. What are the advantages of joining the National Pension Scheme?

2. Define NPS.

3. What are intermediaries for PFRDA?

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