10 things you wanted to know about the new pension bill

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The Pension Fund Regulatory and Development Authority Bill, 2011, was passed in the Lok Sabha on Wednesday. It will now go to the Rajya Sabha. If passed in the Upper House, it would become law after the Presidential assent. Business Standard brings to you certain important details about the new Bill

What does the new pension law do?

The Bill seeks to give statutory powers to the interim authority set up in 2003. It also formally changes the name of the New Pension System to the National Pension System (NPS).

What is NPS?

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. This scheme is different from the earlier defined benefit scheme.

How does it work?

Under the NPS, every subscriber will have an individual pension account, which will be portable across job changes. The subscribers will get to choose fund managers and schemes to manage their pension wealth. They will also get to have the option of switching schemes and fund managers.

Can non-govt employees and general public subscribe?

The NPS was extended to all general citizens through a central government notification in May 2009.

Is it compulsory?

The Bill provides a structure (NPS) to plan for old-age income security. However, it is optional for those in the unorganised sector.

This differs from the system in countries such as the United States, which have a mandatory system to ensure that all persons have old-age income security.

When was it first introduced?

It was introduced in the Lok Sabha in 2005. But this lapsed as it could not be passed before the end of the term of the UPA-I government.

Who were the main opponents of the Bill?

The Left parties were opposed to the NPS. Later in the Left-less UPA-II, Mamata Banerjee’s Trinamool Congress also opposed the passage when the then finance minister introduced it in 2011. The Bill was referred to a standing committee. Both groups opposed it even this time.

Why are political parties opposed to it?

In the NPS, the investment risk is entirely borne by the employees. Further, there will be no explicit or implicit guarantee on the pension wealth, except in cases where the subscriber purchases market-based guarantees. This rule differs from bank deposits, where deposits up to Rs 1 lakh are guaranteed.

How has NPS done so far?

The total corpus and number of enrolments to the NPS have been lower than expected. Recommendations have been made by committees to the government to make efforts to popularise the scheme.

How can it help the industry?

The new law could help 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 mobilise substantial long-term funds, which can be used to build infrastructure.

Sources: PRS Legislative Research, news reports