The Cabinet gave its approval to Varishtha Pension Bima Yojana (VPBY), 2017 last week. The scheme will be implemented through Life Insurance Corporation of India (LIC), and aims to provide social security to senior citizens. It will give an assured pension, offering an 8% per annum guaranteed rate of return for 10 years, with an option for pension on a monthly, quarterly, half-yearly or annual basis.
What is it?
VPBY was first introduced as a pension scheme by the National Democratic Alliance (NDA) government for senior citizens, aged 55 years and above, in July 2003 but was withdrawn a year later. Current finance minister Arun Jaitley re-announced this scheme in the 2014-15 budget. The scheme remained open for subscription between August 2014 and August 2015. The scheme offered annuities in monthly, quarterly, half-yearly and annual modes, varying, between Rs500 and Rs5,000 (monthly), Rs1,500 and Rs15,000 (quarterly), Rs3,000 and Rs30,000 (half-yearly) and Rs6,000 and Rs60,000 (annually). Maximum purchase price was Rs6,66,665. The scheme offered an assured return of 9% on monthly payment basis, which amounted to annualized return of 9.38%.
Under the scheme, the difference between the effective yield paid to the pensioner, and that earned by LIC, is compensated as subsidy to LIC by the government. While the recently approved VPBY 2017 is providing a lesser return—8% per annum— given the current falling interest rate regime, experts believe that it is a good offering.
“The purpose of VPBY 2017 is to help those citizens who rely on interest income from their retirement savings to cope with lower interest rate environment. The 8% interest is competitive given very low, even negative in some cases, interest rate environment globally," said Mukul G. Asher, professorial fellow, Lee Kuan Yew School of Public Policy, National University of Singapore. The interest rate on monthly income scheme of post offices is 7.7%, which, too, can come down further if there is further decline in the yields on government bonds.
Under the new scheme, the fixed interest rate commitment is of 10 years, which has faced some criticism. But Asher believes that “a 10-year duration is reasonable and indeed a sign of good design". The macroeconomic environment may change over time, and sunset clauses are needed in all such schemes, so that a fresh view can be taken at the time of sunset, he explained.
Other details of the scheme are awaited. Like the earlier scheme, it is expected that the maximum pension ceiling will apply to the whole family, i.e., total amount of pension under all the policies issued to a family under this plan shall not exceed the maximum pension limit. The family, for this purpose, will comprise the pensioner, his or her spouse and dependants.