 "systematic investment plan, SIP, Mutual fund")
The finance ministry will examine global best practices and draw insights from the Employees’ Provident Fund Organisation (EPFO) investment experience before finalising its strategy for investing the government’s contribution under the Unified Pension Scheme (UPS), which came into effect on April 1.
“We are still deciding how the government will invest its contribution. We will have some mechanism for it. There will be an investment committee. We will take three to four months to finalise it. We are trying to understand how other countries do it. We will also be studying how EPFO invests its money as it has long experience in it,” a senior government official said. According to the current pattern of investment notified by the labour ministry in April 2015, the EPFO can invest anywhere between 5 per cent and 15 per cent of its fresh accretions in the equity market through the exchange-traded fund (ETF) route only.
Canada Pension Plan (CPP) invests 40-50 per cent of its funds in equities, while Japan’s Government Pension Investment Fund allocates about 25 per cent to equities, including domestic and foreign markets.
The UPS was approved by the central government in August last year to provide a guaranteed pension to retirees with a minimum of 25 years of service.
The pension will be equivalent to 50 per cent of their average basic pay from the last 12 months prior to retirement.
The government’s contribution under UPS has been increased from 14 to 18.5 per cent of basic pay and dearness allowance while employee contribution will remain at 10 per cent. The scheme is likely to benefit over 2.3 million central government employees. Existing and future employees will also have the option of joining the National Pension Scheme (NPS) or UPS by June 30. The choice, once exercised, will be final. Provisions of the UPS would also apply to past retirees of the NPS.
According to the government, the expenditure for arrears will be ₹800 crore. The annual cost increase will be around ₹6,250 crore in the first year.
The official said that till the government takes a decision on how to invest its contribution, the money will remain in the default investment pattern split in equities and bonds.
“Suppose, we decide after three months that 50 per cent of the money should be invested in equities, then we will allocate accordingly,” the government official added.
According to the default option under NPS, the maximum equity exposure is capped at 50 per cent. And, it gradually decreases every year as the retirement of employees approaches.
In March 2023, the Narendra Modi government had set up a committee led by former finance secretary T V Somanathan to explore ways to improve pension benefits under NPS without reverting to the non-contributory old pension system (OPS), which has been deemed financially unsustainable.
The number of years of minimum qualifying service period under the OPS was 20 years for drawing a full pension.
In the case of UPS, it has been raised to 25 years.
In OPS, the monthly assured pension was 50 per cent of the 10 monthly average basic pay immediately prior to superannuation.
In the case of UPS, it has been raised to 12 months.
In OPS, the employee starts drawing a pension as soon as he or she retires. But in UPS, the employee has to wait till the age of 60 to start drawing a pension.
THE FINE PRINT
EPFO’s investment approach and global practices under review
UPS came into effect on April 1; approved in August last year
Govt contribution raised from 14% to 18.5% of basic pay + DA; employee share at 10%
The scheme will benefit over 2.3 million central government employees
Employees must choose between NPS and UPS by June 30; decision will be final
UPS offers guaranteed pension: 50% of average basic pay over last 12 months (vs 10 months in OPS)
Minimum qualifying service raised from 20 to 25 years (vs OPS)
Pension under UPS starts at 60; in OPS, it began immediately post-retirement
