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Dear friends,

Mumbai

August 30, 2008

The country's pension sector has been opened up a notch wider, with the New Pension Scheme (NPS)-currently restricted to government employees-set to be extended to individuals outside the government.

Finance minister P Chidambaram on Friday announced that the finance ministry has advised the Pension Fund Regulatory and Development Authority (PFRDA) to open up the scheme to private citizens too. The pension regulator will soon put in place the framework to facilitate those working in the unorganised sector to participate in the scheme. The plan is to allow pension fund managers licensed by PFRDA to offer schemes to individuals across the country, using the vast network of banks and other agencies to collect the subscriptions.

Of an estimated 425 million workers in the organised sector, a large number does not have access to any social security scheme. It is this segment and those in the unorganised sector that NPS seeks to cover.

NPS now covers all those central government employees who joined service on or after January 1, 2004. The scheme is based on defined contributions unlike the present system, in which the pension benefits are based on a formula linked to the last-drawn salary. In NPS, the payout on completion of the scheme or on retirement will hinge on the returns generated from the contributions made by the subscribers. The key difference in NPS compared to the old pay-as-you go scheme is that the benefits are not defined or assured. This reduces the liability of the government or the employer to that extent.

Mr Chidambaram's announcement came at a function to mark the launch of the central recordkeeping agency for NPS. NPS only logical answer, says FM

National Securities Depository (NSDL) is the central recordkeeping agency for the new pension scheme. According to the finance minister, with rising life expectancy, it is all the more important to ensure social security for the country's citizens.

The average life expectancy of a person retiring at 60 has now risen to 78. With better living conditions and nutrition, this period of retirement is bound to increase further, possibly even to the extent of equalling the years spent working. In such a scenario NPS, aided by the central recordkeeping agency, which would act as a means of administration and as an operational interface between PFRDA and other NPS intermediaries such as pension funds, trustee banks and annuity providers, would be the only logical and compassionate answer to provide for the sunset years of several thousand Indians, Mr Chidambaram said.

The current size of unfunded pension liabilities is over 50% of the GDP. "Thank God, there are not more actuaries in this country to catch onto the ticking time bombs that they have become," he said.

Mr Chidambaram appealed to one of the states seeking to set up its own central recordkeeping agency to use NSDL's services. Referring to the move, he said it was like looking for a black cat in a dark room, while adding that the country owed a debt to NSDL for the projects it has undertaken, including the tax information network.

PFRDA chairman D Swarup said a key requirement in the opening up of the sector was to ensure a level playing field in terms of tax treatment. Compared with all other social security schemes, NPS attracts a tax at the last stage, which is on maturity. Such a taxation system creates a distinction between organised and unorganised sectors and also between those who joined the government before 2004 and after that.

Sebi chairman CB Bhave, who had a big role in the central recordkeeping agency project as well as the growth of NSDL, said the depository should continue its socially beneficial projects. He also promised due support from the regulator for all such initiatives.

[Source: The Economic Times]

Regards,

Thanks a lot Mr.Agarwal,
The article that you have posted helped me in doing my MBA assignement :)
I will be highly greatful to you if you can please highlight some of the pros and cons of the new pension scheme..
waiting for reply..
Thanks,
Sridevi

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