Pension Landscape in India: National Pension System Northern India Regional Council of Institute of Chartered Accountants of India September 3, 2016 Dr B S Bhandari Whole Time Member (Economics) Pension Fund Regulatory and Development Authority, India

Overview Income, Demographics & Occupation structure Govt. Initiatives in Social Security: Pension Landscape in India National Pension System: Structure & Coverage Role of PFRDA in Protecting Interest of Employees/ subscribers Cost Structure New Initiatives

Income, Demographics & Occupation Structure

Population in Five Year Age-Group

Decadal Growth Rates of Elderly & General Population

Old Dependency Ratio India : 1991 to 2011 Old Dependency Ratio, India Old Dependency Ratio = No. of persons in age group 60 years or more ÷ No. of persons in age group years ODR is continuously rising, leading to higher responsibility on working age population to support the aged population

Employment in Organized and Unorganized Sector (Million) NSS Round Total Employment Organized Sector Workers Unorganized Sector Workers % Organized Sector Workers % Unorganized Sector Workers 55th round ( ) st round ( ) th round ( ) th round ( )

Social Security: Pension Landscape in India

Pension Landscape Organised Sector Central and State Government Employees – DB System Central Govt: 53 lakh pensioners, 37 lakh serving EPFO : 3.6 lakh establishments, 3.49 crore active members, 51 lakh pensioners, Exempted funds – 4737 establishments, 7.6 lakh members Superannuation funds Occupational provident funds Coal Miners units lakh members Assam Tea Plantation tea estates lakh members Jammu & Kashmir Provident Fund - Seamens’ provident Fund - 52,855 National Pension System 1.33 crore Social Pension (means tested) National Social Assistance Programme - IGNOAPS – million - IGNWPS million - IGNDPS – 1.0 million Personal Pension Pension Products of Insurance Companies and MFs Public Provident Fund Pension coverage estimated to be just about 13 % of working population and 8.5 % of working age population

Voluntary Pension plans Superannuation funds either privately run by managers appointed by employer’s constituted Trusts or provided by the Life Insurance Corporation (LIC) Annuities provided by the life insurance companies regulated by the Insurance Regulatory & Development Authority of India (IRDAI) Pension/ Retirement Plans floated by mutual funds regulated by the Securities & Exchange Board of India (SEBI). These are not mandatory but enjoy tax deductions at contribution, accumulation and partially at withdrawal stages and are subject to prudential investment regulations as per IRDAI or SEBI

Pension Reforms : Introduction of NPS Pension Fund Regulatory & Development Authority (PFRDA) established initially through a resolution in 2003 & by an Act in 2014 PFRDA Act Preamble: “…. to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.” A shift from Defined Benefit non-contributory pay-as-you-go pension system to Defined Contribution pension system - National Pension System (NPS) notified with effect from the 1st January, 2004 initially for new recruits to Govt service. All but 2 State govts have also joined NPS. Since May, 2009 extended to all citizens including self employed professionals and others in the unorganized sector on a voluntary basis

Oversight office NPS Architecture for Government Sector

No. of subscribers and AUM

SectorNumber of Subscribers As on (in lakh) Number of Subscribers (% of Total) Total Assets Under Management (Rs cr) Total Assets Under Management (% of Total) Central Government , State Government , Sub Total , Corporate , All Citizen , Sub Total , NPS Lite , APY , Sub Total , Grand Total ,

Investment Pattern – Govt. Employees Up to 50% in Government securities, as on % Up to 45% in Corporate Debt, as on – 35.4 % Up to 15% in Equity & related instruments – as on % Up to 5% in Short term debt instruments & related investments – 0.85 % Up to 5% in Asset backed, trust structured etc. investments

 Investment Option can be changed once in a financial year Age (in Years)Asset Class EAsset Class CAsset Class G Upto 3550%30%20% 3648%29%23% 3746%28%26% and Above10% 80% Active Choice Subscriber decides allocation pattern amongst E, C and G Auto Choice Funds managed on the pattern of a lifecycle fund Asset ClassCap on Investment Equity (E)50% Corporate Bonds (C)100% Government Securities (G)100% 18

Returns since inception (31 st March 2016) Pension unds→SBIUTILIC KOTA K RELIA NCEICICIHDFC Schemes↓ CG SG Corporate-CG TIER I E C G TIER II E C G NPS Swavalamban

Tax incentives under NPS (Tier-1) On Employee’s contribution : Eligible for tax deduction up to 10% of salary (Basic + DA). Within the overall ceiling of Rs Lacs On Employer’s contribution : Up to 10% of Basic & DA (no upper ceiling ) under 80CCD(2). This is over and above 80 C. Exclusive Tax benefit : From F.Y , subscribers allowed tax deduction in addition to the deduction allowed under Sec. 80CCD(1) for contribution to NPS account subject to a maximum of Rs. 50,000/-

Partial Withdrawal Withdrawal not exceeding twenty-five percent (25%) of own the contribution for following purposes: Higher education and Marriage of children including a legally adopted child. Purchase/construction of one residential house. Treatment for specified illnesses – suffered by subscriber, legally wedded spouse, children or dependent parents. Subject to : Subscriber should have been in NPS for at least ten years Maximum three withdrawals allowed with a gap of 5 years in between.

Annuity service providers 1.SBI Life Insurance Company Limited 2.HDFC Standard Life Insurance Co. Ltd. 3.ICICI Prudential Life Insurance Company Limited 4.Life Insurance Corporation of India 5.Star Union Dai-ichi Life Insurance Company Limited

Annuities Annuity for life. Annuity guaranteed for 5, 10, 15 or 20 years and for life thereafter. Annuity for life with return of purchase price on death. Annuity for life increasing at simple rate of 3 per cent p.a. Annuity for life with a provision for 50 per cent of the annuity to the spouse of the annuitant for life on death of the annuitant. Annuity for life with a provision for 100 per cent of the annuity to the spouse of the annuitant for life on death of the annuitant. Annuity for life with a provision for 100 per cent of the annuity payable to the spouse of the annuitant for life on death of the annuitant, with return of purchase price on the death of last survivor.

Protecting Interest of Employees/ subscribers

Protecting Interest of Employees/ Subscribers Registration of intermediaries like POPs, Trustee Bank, CRA, pension funds, etc. on prudent eligibility criteria and competitive bidding basis Subscribers informed of relevant elements of the pension scheme, risks, costs and charges, portability and available choices. Disclose standardized and comparable information across funds and schemes Awareness creation and financial education programmes Well laid procedures for complaints handling and redressal

Grievance Management  Central Grievance Management System (CGMS) is the platform to register grievances for all entities in CRA system  Stipulated timeframe to resolve grievance.  Unresolved grievance gets escalated.  alert sent to concerned entity on resolution/ escalation.  Monitored by NPS Trust / PFRDA. 26

Cost Structure IntermediaryCharge HeadService Charges Method of Deduction PrivateGovt.Lite/APY POP (Charge for each subscriber) Subscriber Registration Rs. 125NA *Rs To be collected upfront from the subscriber NPS Lite/Swavalamban/ APY paid by the Govt. Transaction involving a contribution 0.25% of contribution, Min. Rs. 20 Max. Rs NA *Rs.100 PA CRA PRA Opening Charges Rs. 50/-Rs. 50*Rs. 15/- Through cancellation of units. For govt. subscribers paid by the Govt. AMC per account Rs. 190/-Rs. 190*Rs. 40/- Charge per transaction Rs. 4/-Rs. 4* Free Trustee BankNil NA PFM Charges Investment Management Fee 0.01% p.a % p.a. Through NAV deduction Custodian (On asset value in custody) Asset servicing charges % p.a. for electronic segment Through NAV deduction * Paid by Government

Low cost Charge Ratio is an indicator that measures the impact that any type of charge can have on the final balance of an individual retirement account compared to the hypothetical balance that could be obtained if no fees were charged at all. As per a study by International Organisation of Pension Supervisors (IOPS), NPS has the lowest charge ratio (2.93%) in the world. The Equated Annual Fee (EAF) works to less than 0.5 % of the AUM. An increase in the annual management charge of 1% of funds under management can reduce accumulated assets by 20% over a 40 year period.

New Initiatives : eNPS Online platform to open Individual Pension Account under NPS (Tier-I & Tier-II) and make contributions using net banking and debit/credit cards. KYC through two alternatives :- Aadhaar based PAN and Savings Bank Account details with a Bank that is empanelled in eNPS. – Subscribers – Tier I- 51,140, Tier II – 13,858 – No. of Transactions – Tier I – 1,89,102, Tier II – 35,813 – Transaction amount – Tier I – cr, Tier II – cr

New Initiatives: Mobile App Change of address using Aadhaar authentication Scheme Preference change facility Tier II activation through eNPS Facility to contribute Online Online Withdrawal processing

Attributes of NPS Ease of joining / contribution– eNPS Portability across employer/location Tax Benefit Low cost structure Online interface for subscribers Online grievance redressal Online withdrawal/exit with timelines

Challenges Coverage – Awareness – Financial literacy Affordability: For a large section of low paid workers in the unorganised / informal sector arranging for the periodic contribution is a problem. Adequacy : Adequacy of pension on superannuation/ exit is another issue for the low paid workers in the unorganised / informal sector whose monthly contributions are abysmally low. Sustainability : This has been taken care of to some extent by shift from Defined Benefit pension to Defined Contribution pension. Efficiency : NPS architecture has been built on low cost distribution, administration, asset management etc. However the competing products from the insurance companies and mutual funds have been have been a cause of concern in NPS marketing and distribution. Security : Even though NPS is offered on a technology intensive and effectively monitored and supervised regulatory platform, subscribers particularly with low financial literacy and awareness at times fall prey of the distribution channel which may mis-sell.

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