Nomination provisions require an overhaul

Nomination rules can be justified as being products of their times, but there is no excuse for not revising them to reflect new realities

There is a need to make succession smoother and simpler by reimagining the entire nomination process. Today I shall write about nomination provisions across retirement schemes: Government Provident Fund (or GPF, applicable to government employees who started their jobs prior to 2005), National Pension System (or NPS, applicable to government employees who started their jobs 2005 onwards, private-sector employees, and the self-employed, including low-income persons under the Pension Lite programme), and Employee Provident Fund (EPF) with Employee Pension Scheme (EPS) and Employee Deposit Linked Insurance Scheme (or EDLIS, applicable to all non-government sector employees).

Despite the vintage of the regulations (GPF regulations date back to 1925), some provisions are surprisingly modern. Some schemes allow pre-designating alternative nominee(s) if the preferred nominee predeceases the contributor. Some schemes allow relatives to withdraw money if the contributor is incapacitated. Most allow nomination to be seen, changed or made online. These provisions are quite modern and worthy of emulation by the relatively more modern mutual fund industry.

However, the rest of the nomination provisions are soaked in paternalism and are sexist. They treat the contributor not as an investor but as a recipient of government benefits.
 

First, there is the insistence across the board that only “family members” can be nominee(s), and that too as defined under each scheme. Each scheme even has a different definition of what constitutes family. Even the three schemes governed by the Employees’ Provident Fund Organisation (EPFO) — EPF, EPS and EDLIS — define “family” differently. If a person is estranged from his family, there is no possibility of him leaving his money to anybody other than his family.

The provisions also differentiate between male and female contributors. A female contributor can appoint her dependent parents-in-law as nominees, but the husband can’t have his wife’s parents as nominees even if they are dependent on him. In EPF, the definition of family and the rules for who can or can’t be nominated are extremely complicated. The detailing goes to the extent that there is even a rule saying a nominee accused of murdering the contributor can’t be paid the dues while the trial is on.

Some schemes invalidate earlier nominations after events like the subscriber’s marriage. One rather draconian provision is that if an unmarried contributor had nominated her parents, and then gets married but forgets to update the nomination, the account is treated as one without a nominee.  

These rules can perhaps be justified as being products of the times in which they were created. But there is no excuse for not revising them to reflect new realities and social mores. They need to reflect the basic fact that the EPFO, GPF authorities and Pension Fund Regulatory and Development Authority are fund managers for individuals’ long-term retirement savings. While reasonable safeguards should be built in, there can’t be restrictions on the individual’s right to leave her money to whoever she wants.

Truth be told, the focus of retirement saving has been on accumulation, with little attention to what happens if the contributor dies. It is time for a comprehensive review of the provisions to modernise and harmonise them across retirement products. A recent white paper has made several valuable suggestions in this regard.  

Note: This article is based on the White Paper: “Reimagining Nominations — Making Succession Smoother and Simpler” written by Pramod Rao (Chief General Counsel of ICICI) in his personal capacity. My colleagues and I at ARIA, a Section 8 not-for-profit company, provided inputs for the white paper.

The writer heads Fee Only Investment Advisers LLP, a Sebi-registered investment adviser