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Finance ministry awaiting cabinet nod to NPS proposal

Finance ministry awaiting cabinet nod to NPS proposal
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First Published: Wed, Apr 11 2007. 12 28 AM IST
Updated: Wed, Apr 11 2007. 12 28 AM IST
The finance ministry has sought the Union cabinet’s approval to kick-start pension reforms by moving Central government employees who joined after 31 December, 2003, to a New Pension System (NPS).
The finance ministry has already sent a note to the cabinet seeking its approval to start NPS, a senior finance ministry official told the media on the sidelines of a pension conference.
Simultaneously, D. Swarup, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), said the National Securities Depository Ltd (NSDL) has been selected as the central recordkeeping agency, NPS’ back office.
The regulator’s next step would be to choose two or three pension-fund managers from the public sector in a few weeks, added Swarup.
Nineteen of India’s 28 states have already said they are committed to NPS and are expected to follow the Centre once it starts the scheme.
After the finance ministry proposal gets the cabinet’s nod, 500,000 Central government employees will move to NPS, which has an initial corpus of about Rs1,700 crore. This corpus is currently parked in the Public Account of India, where it receives a fixed 8% return a year.
These employees will be the first lot who will not be guaranteed a fixed amount of pension at the beginning of their career. Employees of an earlier vintage are guaranteed 50% of the average of their last 10 months’ pay as pension.
The pension of NPS members would depend purely on the performance of their savings. Unlike their predecessors, these employees would have the option of putting up to 15% of their savings in the equity market. The alternative being offered is investing the entire savings in risk-free government securities.
Swarup said he would work on bringing government employees, who are a part of the existing guaranteed-returns scheme, into NPS. However, he acknowledged that this would be a challenging task.
The proposal may not be immediately acceptable to the central government as the pension savings of its employees are used to fund its fiscal deficit.
The government’s move to kick-start NPS comes in the backdrop of delays in pension reforms.
A Bill on pension reforms introduced in Parliament two years ago has been stalled as Communist parties oppose the move to shift to a system without guarantees of the sort enjoyed by government employees today.
One of the key features of the stalled pension Bill is that it envisages providing India’s unorganized sector workforce a safety net.
India’s total workforce is about 360 million, of which only 11%, including government employees, have some kind of pension plan.
In this context, the biggest challenge the pension sector faces is ignorance, felt Sanjay Aggarwal, National Industry Director-Financial Services, KPMG.
“At the end of the day, what is most important is to create customer awareness. The private sector will educate people faster,” he added.
The pension Bill wanted to open the fund management business to private sector participation.
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First Published: Wed, Apr 11 2007. 12 28 AM IST