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Editorial Articles

volume-32, 09-15 November 2019

Pension Schemes to Widen Pension Infrastructure


Shishir Sinha

India has improved its ranking in Melbourne Mercer Global Pension Index, a well-recognised benchmark for assessing country's performance in providing pension and retirement benefits to its citizens.

2019 Index places India at 32nd position out of 37 countries while in 2018 it was at 33rd position out of 34 countries. Its score improved to 45.8 in 2019 from 44.6 in 2018. Still, it is just a notch above the last grade and placed along with Argentina, China, Japan, Korea, Mexico, Philippines, Thailand and Turkey. How is the system in these countries? Answer to this question lies in the description related with the group which reads like this, "A system that has some desirable features, but also has major weaknesses and/or omission that need to be addressed. Without these improvements, its efficacy and sustainability are in doubt."

Denmark, Netherlands and Australia are top three countries in this ranking with index value of 75 to 80 and above.

Talking about India, the report says that the Indian index value increased due to small increase in each of the three sub-indices, which are adequacy, sustainability and integrity. The adequacy sub-index considers the benefits provided to the poor and a range of income earners as well as several design features and characteristics which enhance the efficacy of the overall retirement income system. Here, Indian's sub-index value improved to 39.9 from 38.7

The sustainability sub-index considers a number of indicators which influence the long-term sustainability of current retirement income systems. Here, India's score was 44.9 up from 43.8. Finally, the integrity sub-index considers three broad areas of the pension system, namely regulation and governance; protection and communication for members, and operating costs. In this category, India scored 56.3 from 55.2.

The report noted that here retirement income system comprises an earnings-related employee pension scheme, a defined contribution employee provident fund, and supplementary employer managed pension schemes that are largely defined contribution in nature. Government schemes have been launched as part of universal social security program aimed at benefiting the unorganised sector. The National Pension System is gradually gaining popularity, it said.

Let us discuss key pension schemes available in India:

National Pension System (NPS)

Introduced from January 1, 2004, it brought about a paradigm shift in the pension system especially for Government employees. With this pension became 'contributory' from 'defined'. According to a Government gazette notification dated December 22, 2003, the

system became mandatory for all new recruits to the Central Government services from January 1, 2004 (Except the armed forces in the first stage. Initially, every recruit was asked to contribute 10 per cent of the basic salary and DA (Dearness Allowance) and matched. However, there will be no contribution from the Government in respect of individuals who are not Government employees.

Under this system, there are two types of account, tier-I and tier-II.  First one is non-withdrawable till the age of retirement i.e. 60 years. Even at the time of retirement, 40 per cent of accumulated wealth would be required to invest in annuity, which will provide monthly pension to the Government employees and thereafter his/her, spouse and dependent parents. Remaining 60 per cent would be paid lump sum to the employees. If anyone leaving the pension system before the age of 60, he/she will get 20 per cent as lump-sumps, while mandatory annuitisation would be 80 per cent of the pension wealth. Here, contribution, accumulation and withdrawal do not attract tax.

Tier-II account would be voluntary and withdrawable. This option has been given as General Provident Fund (GPF) is no longer available for recruits joining Government services on or after January 1, 2004. However, Government does not contribute into this account, though it is managed like tier-I. The employee is free to withdraw amount from this account any time. There is no special tax treatment for this account.

Meanwhile, the Centre, through a Cabinet decision on December 6, 2008, announced following changes in NPS for the Government employees

  • Enhancement of the mandatory contribution by the Central Government for its employees covered under NPS Tier-I from the existing 10% to 14%.
  • Providing freedom of choice for selection of Pension Funds and pattern of investment to central government employees.
  • Payment of compensation for non-deposit or delayed deposit of NPS contributions during 2004-2012.
  • Tax exemption limit for lump sum withdrawal on exit has been enhanced to 60 per cent. With this, the entire withdrawal has now been exempted from income tax.
  • Contribution by the Government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs. 1.50 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund provided that there is a lock-in period of 3 years.

Changes will benefit to approximately 18 lakh central government employees covered under NPS. It is expected that State Governments will also extend the benefit to its employees enrolled under NPS.

After successful implementation for the Central Government employees, NPS was made available to all citizens of India from May 1, 2009, to corporate in December 2011, to Non-Resident Indians in October 2015 and to Overseas Citizen of India in October 2019.  A citizen of India, whether resident or non-resident, can subscribe NPS. He/she should be between 18 - 60 years of age as on the date of submission of his/her application and comply with the Know Your Customer (KYC) norms. Here too, the subscribers will have option for both tier-I and tier-II accounts. Terms and conditions for these accounts will be same like for the Government employees, however, the Government will not make matching contribution in tier-I.

Employees' Pension Scheme, 1995 (EPS)

Subscriber of Employee's Provident Fund (EPF) is eligible for this pension scheme and he/she automatically gets enrolled after becoming part of EPF. Only difference here is that not employee but employer and the Government make the contribution. Also return here is granted.

The scheme is managed by Employees' Provident Fund Organisation (EPFO) and ensures that employee gets a pension once he or she attains the age of 58 years. As of now, employee and employer contribute 12 per cent of employee's basic salary plus dearness allowance towards EPF. Employee's entire contribution of 12 per cent is deposited in EPF while 8.33 per cent (out of 12 per cent) from employers goes towards EPS and remaining in EPF. Also, the Government contributes 1.16 per cent (of employee's basic plus DA) towards EPS as well.

One is eligible to get pension under EPS 95 after attaining the age of 58 years. However, there is one condition which says the benefits of the scheme can be availed only if the employee served for at least 10 years (this does not have to be continuous service). In case the widow/widower is receiving the EPS amount, they will continue to receive the amount until his/her death. After that, the children will receive the pension amount until they attain the age of 25 years. In case the child is physically challenged, they will receive the pension amount until his/her death.

As of now, floor for monthly pension is

Rs. 1,000, while maximum has been capped at Rs. 15,000. However, the Supreme Court upheld the Kerala High Court verdict on monthly pension from the EPS 95. The cap of Rs. 15,000 on the basic salary was removed by the High Court. Also, there is long pending proposal to double the minimum pension to Rs. 2,000. Meanwhile, both the changes are yet to be implemented as no guidelines have been issued for implementing decisions of the apex court, while Central Board of Trustees (CBT) has not recommended doubling the minimum limit.

Atal Pension Yojana (APY)

As a part of Jan Dhan se Jan Suraksha, APY was launched on May 9, 2015 by the Prime Minister. It is open to all saving bank/post office saving bank account holders in the age group of 18 to 40 years and the contributions differ, based on pension amount chosen.  Subscribers would receive the guaranteed minimum monthly pension of Rs. 1,000 or Rs. 2,000 or Rs. 3,000 or Rs. 4,000 or Rs. 5,000 at the age of 60 years.

Under APY, the monthly pension would be available to the subscriber, and after him to his spouse and after their death, the pension corpus, as accumulated at age 60 of the subscriber, would be returned to the nominee of the subscriber. The minimum pension would be guaranteed by the Government, i.e., if the accumulated corpus based on contributions earns a lower than estimated return on investment and is inadequate to provide the minimum guaranteed pension, the Central Government would fund such inadequacy. Alternatively, if the returns on investment are higher, the subscribers would get enhanced pensionary benefits.

In the event of pre-mature death of the subscriber, Government has decided to give an option to the spouse of the subscriber to continue contributing to APY account of the subscriber, for the remaining vesting period, till the original subscriber would have attained the age of 60 years. The spouse of the subscriber shall be entitled to receive the same pension amount as that of the subscriber until the death of the spouse. After the death of both the subscriber and the spouse, the nominee of the subscriber shall be entitled to receive the pension wealth, as accumulated till age 60 of the subscriber.

Pradhan Mantri Shram Yogi Maan-dhan (PM-SYM)

This scheme is meant to provide workers in unorganised sector. After announcement in the interim budget on February 1, 2019, the scheme was rolled out by the Ministry of Labour and Employment on February 15, 2019.

As many as 42 crore workers are estimated to be engaged in the unorganized sector of the country. These workers mostly engaged as home based workers, street vendors, mid-day meal workers, head loaders, brick kiln workers, cobblers, rag pickers, domestic workers, washer men, rickshaw pullers, landless labourers, own account workers, agricultural workers, construction workers, beedi workers, handloom workers, leather workers, audio- visual workers and similar other occupations.

Any such worker with monthly income up to Rs. 15,000 belong to the entry age group of 18-40 years are eligible for the scheme. They should not be covered under New Pension Scheme (NPS), Employees' State Insurance Corporation (ESIC) scheme or Employees' Provident Fund Organisation (EPFO). Further, he/she should not be an income tax payer.

The subscriber's contributions to PM-SYM shall be made through 'auto-debit' facility from his/ her savings bank account/ Jan- Dhan account. The subscriber is required to contribute the prescribed contribution amount from the age of joining PM-SYM till the age of 60 years.

Each subscriber under the PM-SYM, will receive minimum assured pension of Rs. 3000 per month after attaining the age of 60 years. During the receipt of pension, if the subscriber dies, the spouse of the beneficiary shall be entitled to receive 50 per cent of the pension received by the beneficiary as family pension. Family pension is applicable only to spouse.

If a beneficiary has given regular contribution and died due to any cause (before age of 60 years), his/her spouse will be entitled to join and continue the scheme subsequently by payment of regular contribution or exit the scheme as per provisions of exit and withdrawal.

 PM Kisan Maan-dhan Yojana

This scheme was launched on September 12, 2019. It is a voluntary and contributory scheme for farmers in the entry age group of 18 to 40 years. Subscriber will get a monthly pension of Rs. 3000 on attaining the age of 60 years.  This scheme is likely to benefit nearly 5 crore small and marginal farmers

Interested farmers will have to make a monthly contribution of Rs. 55 to Rs. 200, depending on their age of entry, in the Pension Fund till they reach the retirement date i.e. the age of 60 years. The Central Government will also make an equal contribution of the same amount in the pension fund. The spouse is also eligible to get a separate pension of Rs.3000/- upon making separate contributions to the Fund. The Life Insurance Corporation of India (LIC) shall be the Pension Fund Manager and responsible for Pension pay out.

In case of death of the farmer before retirement date, the spouse may continue in the scheme by paying the remaining contributions till the remaining age of the deceased farmer. If the spouse does not wish to continue, the total contribution made by the farmer along with interest will be paid to the spouse. If there is no spouse, then total contribution along with interest will be paid to the nominee. If the farmer dies after the retirement date, the spouse will receive 50 per cent of the pension as Family Pension.

After the death of both the farmer and the spouse, the accumulated corpus shall be credited back to the Pension Fund. The beneficiaries may opt voluntarily to exit the Scheme after a minimum period of 5 years of regular contributions. On exit, their entire contribution shall be returned by LIC with an interest equivalent to prevailing saving bank rates.

The farmers, who are also beneficiaries of PM-Kisan Scheme, will have the option to allow their contribution debited from the benefit of that Scheme directly. In case of default in making regular contributions, the beneficiaries are allowed to regularize the contributions by paying the outstanding dues along with prescribed interest. The initial enrolment to the Scheme is being done through the Common Service Centres in various states.

Pradhan Mantri Laghu Vyapari Maan-dhan Yojana

This scheme was also announced in the Union Budget 2019-20 and made operational from July 22. This scheme is meant for small businessmen who are self-employed and working as shop owners, retail traders, rice mill owners, oil mill owners, workshop owners, commission agents, brokers of real estate, owners of small hotels, restaurants and other small businessmen. The operations of such small traders are generally characterized by family owned establishments, small scale of operations, labour intensive, inadequate financial aid, seasonal in nature and extensive unpaid family labour. Nearly three crore small businessmen are likely to be covered initially.

This Scheme will be open only to those small businessmen whose annual turnover does not exceed Rs 1.5 crore, based on self-declaration, who has a savings bank account in his/her name and Aadhar number. He/she should be less than eighteen years of age and not exceeding forty years of age.  Those will not be eligible to join the scheme, if he/she is covered under National Pension Scheme contributed by the Central Government or Employees' State Insurance Corporation Scheme under the Employees' State Insurance Act, 1948 or Employees' Provident Fund Scheme under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 or if he/she is an income-tax assessee.

Each eligible subscriber under this scheme will receive assured minimum monthly pension of Rs 3,000 after attaining the age of 60 years through Life Insurance Corporation of India. Once the eligible subscriber joins this scheme at the entry age between 18-40 years, such subscriber has to contribute till attaining the age of 60 years and on attaining that age, such subscriber will be entitled to get the assured minimum monthly pension with benefit of family pension.


Apart from these Government schemes, there are pension plans offered by financial intermediaries. Still, the fact is that pension penetration is very low. Report accompanying Melbourne Mercer Global Pension Index found that just six per cent working age population are members are private pension plans. At the same time a CRISIL research report (Financial security for India's elderly: The imperatives, April 2017) for pension market regulator PFRDA says that India is a young country in terms of demography, but ageing gradually. "By 2050, every fifth Indian will be a sexagenarian compared with every twelfth now, putting the country in a position similar to today's developed world in terms of the share of the elderly in population. Hence, it is important that the development of the underpenetrated pension market in India be initiated now, when the situation is ripe," it mentioned.

The report has quoted finding of World Health Organisation which says that India's life expectancy has also been on the rise - going from 62.5 in 2000 to 68.3 in 2015. Also, the life expectancy at age 60 stands at 17.9 in 2015 vis-à-vis 16.5 in 2000. All these are preparing a ground for much better and wider pension infrastructure and that too at affordable cost and with simplicity.

(The author is a senior journalist covering business and economy. E-mail id: hblshishir@gmail.com)

Views expressed are personal.

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