Pension reforms in most countries initially are driven by the budgetary difficulties of supporting a public pension system, the longer-term problems of ageing of the population and social change, including breakdown of traditional family support for old age income security, are equally important factors. However, in India, in the absence of a country-wide social security system (formal pension coverage being about 12% of the working population), while the ageing and social change are important considerations for introducing pension reform in the unorganised sector, fiscal stress of the defined benefit pension system was the major factor driving pension reforms for employees in the organized public sector (Government employees).
The New Pension System- now called as National Pension System (NPS) is based on the concept of defined contribution pension system. The Central Government operationalised the NPS from the 1st January, 2004 through a notification dated the 22nd December, 2003. The NPS is mandatory for new recruits to the Central Government services (except the armed forces). The Government had constituted an interim pension sector regulator named as ―The Interim Pension Fund Regulatory and Development Authority‖(PFRDA) through a Government Resolution in October, 2003 as a precursor to a statutory regulator.
An early legislative mandate was considered necessary as the NPS is already in place without the statutory regulatory mechanism. The Pension Fund Regulatory and Development Authority Bill, 2005 (hereafter referred to as PFRDA Bill, 2005) was introduced in Lok Sabha in March, 2005 to establish a statutory Pension Fund Regulatory and Development Authority. The PFRDA Bill, 2005 was referred to the Standing Committee on Finance on the 24th March, 2005 for examination and report thereon. The Standing Committee on Finance gave its Report on the 26th July, 2005. The Government proposed official amendments in January, 2009 to give effect to certain recommendations of the Standing Committee on Finance, but the official amendments could not be moved and the PFRDA Bill, 2005 could not be considered and passed and the same lapsed due to dissolution of the 14th Lok Sabha.
However, pending the passage of the PFRDA Bill, 2005, the Interim Pension Fund Regulatory and Development Authority has created the institutional arrangement of NPS Trust, central recordkeeping agency (CRA), pension fund and a trustee bank (Bank of india). Twenty-Seven State Governments and Union territories have adopted the NPS for their employees and are in the process of extending the NPS to their employees. Sixteen State Governments have already joined the NPS institutional architecture. The NPS has been launched for all citizens of the country including unorganised sector workers, on voluntary basis, with effect from the 1st May, 2009. It has now become necessary to replace the interim arrangements with proper infrastructure under a regulatory framework in order to avoid future complications.
In view of the urgency of the matter, the Pension Fund Regulatory and Development Authority Bill, 2011 is being introduced in Parliament to provide for the establishment of a statutory Pension Fund Regulatory and Development Authority (PFRDA) to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers of various pension fund schemes and for matters connected therewith or incidental thereto. The Pension Fund Regulatory and Development Authority Bill, 2011 was introduced in the Lok Sabha on 24 March, 2011 and the same has been referred to the Standing Committee on Finance on 29 March, 2011 for examination and report thereon.
The Pension Fund Regulatory and Development Authority Bill, 2011, inter alia, provides for: (a) establishing a statutory regulatory body to be called the Pension Fund Regulatory and Development Authority which will undertake promotional, developmental and regulatory functions in respect of pension funds; (b) empowering the PFRDA to regulate the National Pension System, as amended from time to time; (c) empowering the PFRDA to perform promotional, developmental and regulatory functions relating to pension funds (including authorising and regulating intermediaries) through regulations or guidelines, prescribing the disclosure standards, protecting the interests of subscribers to schemes of pension funds; (d) authorising the PFRDA to levy fees for services rendered, etc., to meet its expenses; (e) empowering the PFRDA to impose penalties for any violation of the provisions of the legislation, rules, regulations, etc.
Standing Committee of Finance submitted its report on August 30, 2011. The major recommendations of the Standing Committee are:
1. The provisions of the Bill being broadly in line with the lines of the PFRDA Bill, 2005, the Committee reiterate in principle their recommendations on the PFRDA Bill, 2005 (21st Report, 14th Lok Sabha).
2. The Committee thus find that the subscriber base of the voluntary component of the NPS has been rather narrow, suggesting low popularity of the scheme launched on countrywide scale. The Committee would, therefore, expect the Government to make serious efforts to popularise the scheme so as to achieve the intended objectives.
3. The Committee find that the performance of the Fund Managers appointed by the PFRDA to implement the scheme has been uneven over the last three years or so and the returns generated by them show a downward trend, particularly with regard to the unorganised sector, where the returns have been abysmal. The Committee are extremely concerned to note the negative returns in some of the schemes involving all fund managers. Against such a dismal performance scenario, it becomes imperative that the PFRDA exercises stringent monitoring and reviews the guidelines instructions issued to the Fund Managers periodically and strictly evaluates their performance with a view to ensuring stability of returns to the subscribers.
4. The Committee, therefore, would like to reiterate their earlier recommendation that any decision relating to permitting FDI in the pension sector should be implemented only by way of bringing forward suitable amendment in the present legislation.( and not as per the suggestion of the Department of Financial Services that foreign investment in the pension sector may be capped at 26% under the general regulations framed under the Foreign Exchange management Act, 1999 (FEMA) which is in line with most of the legislations in the financial sector).
5. The Standing Committee has reiterated their earlier recommendation that membership of the Authority should be confined to professionals having experience in economics or finance or law (& not in addition in Administration as suggested by the Department of Financial Services) only.
6. Clause 14(e)(i) should be appropriately amended so as to make it mandatory for pension fund managers to insure the funds deposited by the subscribers in order to provide complete security for their funds.
7. The Committee would recommend that the spirit of the Committee‟s earlier recommendations may be captured in the above clause relating to „withdrawals‟ by wording the same positively as – „withdrawals shall be permitted from the individual pension account, as may be specified under the regulations.‟ The Committee desire that the facility of repayable advance should also be provided to subscribers to enable them to meet important commitments. For this purpose, the subscribers may be allowed to take a repayable advance from their accounts, say after 10-15 years of service. Suitable enabling amendments may accordingly be made in the Bill.
8. The Committee therefore desire that the Government must devise a mechanism to enable subscribers of NPS to be ensured of such a minimum assured/guaranteed returns for their pensions so that they are not put to any disadvantage vis-à-vis other pensioners. The Committee would recommend that the minimum rate of return on the contributions to the pension fund of the employee should not be less than the rate of interest on the Employees Provident Fund Scheme. In the absence of such a guarantee/assurance, the NPS cannot justifiably claim to provide “old age income security.”
9. Clause 23(2) should be amended appropriately to ensure that at least one-third of the fund managers are selected from the public sector.
10. the Pension Advisory Committee to be constituted under Clause 44 (2) of the Bill should be made more representative by specifically providing that the representatives of stakeholders including the employees are directly made as Members of the Committee instead of ‘members, to represent the interests of employees’ associations, subscribers etc.’ as proposed in the Bill. The Committee, therefore, recommend that Clause 44(4) may be amended appropriately to allow the Pension Advisory Committee to play a more meaningful role by rendering advice suo-motu even on matters not referred to it.
11 The Committee would expect the Government to make concerted efforts to extend the coverage of the scheme in both public and private sector without remaining confined to Central Government employees.
12. As the unorganized sector is a very important part of our society and economy, the Committee desire that their social security should be adequately safeguarded in the present era of craving for social inclusion. The Committee would, therefore, like the Government to work out a tripartite kind of a scheme where the State Government, the Central Government and the unorganized sector workers could make contributions.
13. The Committee would further like to emphasise that the National Pension System should not put employees in a straitjacket or in a very rigid framework. The Committee, therefore, desire greater flexibility in the operation of the scheme, whereby the employees will have the choice of the model / scheme as well as the fund managers. On the whole, the Committee would like the National Pension System to evolve in a manner that is more re-assuring to its subscribers.
The Department of Financial Services has examined these recommendations in detail and prepared a cabinet note proposing certain amendments. It is slated to be taken up for discussion shortly.
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