The Hindu Business Line : New pension choice

A year after it was introduced for central government employees, the New Pension Scheme for the general public quietly came into effect, appropriately on May 1, Labour Day. With attention riveted on the general elections and troubles across the border, it was hardly surprising that this landmark policy almost passed unnoticed by those who will benefit from it. It is an historic attempt to alter the long term savings pattern. To the postal savings, and various provident funds can now be added the New Pension Scheme (NPS), radically different from the others in terms of its operational mobility and flexibility of investment options. It is meant to tap the savings of and ensure some life-time protection to more than 80 per cent of the population who are now without any form of social security. Yet the scheme and its lofty vision suffer from some major flaws.

The heart of the new pension plan lies in its flexibility of investment options based on individual choices; an applicant can choose to invest his savings in options that involve high risk and high return such as equity or pure fixed income instruments with low risk and low returns such as state and central government securities, with options in between that focus on corporate debt and bonds. Investments in equity are capped at 50 per cent and will consist of index funds. For those unable or unwilling to choose, the NPS has obligingly introduced the auto choice life-cycle fund, scaled on the basis of the investor’s capacity to bear risk. At entry level of 18 years, 50 per cent will be equity investments but the blend will alter in favour of fixed investments as the beneficiary inches towards middle age and retirement. Unlike postal savings, the NPS also has inbuilt mobility with a Permanent Retirement Account Number (PRAN) that functions like an access code to one’s statements of transactions anywhere in the country. And yet there are some catches in the fine print. On the one hand, the fee of 0.0009 per cent for fund managers is bound to be seen as too low. On the other, the entry cost may appear too high especially for low income savers amounting to a little over 10 per cent of the minimum permissible investment of Rs 6,000 a year. Besides, unlike the provident funds, the withdrawals under the NPS will be taxed as ordinary income thus casting a burden on the beneficiary when he or she can least manage it.

While the NPS is a major step forward, an early approval of the pension fund legislation, the PFRDA Bill, hanging since 2005, and other reforms such as relaxing FDI in the sector will give a push to social security (and savings) and also reduce the fiscal burden of the government.

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