Tuesday, December 31, 2013

The Pension Fund Regulatory and Development Authority (PFRDA) Bill

The Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011, is passed in the Lok Sabha on 4th Sept, 2013. The Bill proposes a statutory authority (PFRDA) to regulate the National Pension System (NPS) which will be extended to all general citizens. NPS is a defined contribution scheme and is based on the principle that 'you save while you earn' especially for retirement. The main objective of the Bill is to help extend pension cover to more citizens of the country. However, it is optional for those in the unorganised sector. NPS is a defined contribution scheme for all central government employees, other than the armed forces, who joined after January 2004. It is implemented through a combination of retailers, pension fund managers, and a record-keeper. Under the new NPS, every subscriber will have an individual pension account, which will be constant across job changes. The subscribers will get a right to manage their funds and have an option of switching schemes and fund manager but have to borne the investment risk without explicit or implicit guarantee on the pension wealth, except in cases where the subscriber purchases market-based guarantees.

The Pension Bill will allow foreign direct investment in the country's pension sector and the overseas investors can own stakes of up to 26% stake in domestic pension funds. However, at least one of the pension fund managers shall be from the public sector. The provisions of the Pension Bill will not apply to Employees Provident Fund Organisation (EPFO) subscribers. EPFO funds will be continued to be managed by the government. NPS was opened up for all citizens of the country including unorgnised sector workers, on voluntary basis, with effect from 1 May 2009. The passage of the pension Bill will be a booster for financing the requirements for infrastructure sector. The total investment in infrastructure sectors in the Twelfth Plan (2013-17) is estimated to be Rs. 55.7 lakh crore, and pension funds are supposed to contribute at least Rs. 1.5 lakh crore, according to estimates.

The Bill is currently pending in Rajya Sabha. It will provide a structure (NPS) to plan for old-age income security and will help to bring in new pension products in the market, thereby giving a choice to customers. Competition could also improve quality of service and returns. If these measures are successful, these could help to mobilise substantial long-term funds, which can be used to build infrastructure.

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