Reforms In the National Pension System

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    Recently, the Pension Fund Regulatory and Development Authority (PFRDA) chairman Supratim Bandyopadhyay has said that the limit on funds under the National Pension system (NPS) at the time of retirement will be revised to ?5 lakh.

    Background

    • The NPS was started as the New Pension Scheme for government employees in 2004 under a new regulator called the Pension Fund Regulatory and Development Authority (PFRDA).
    • It is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life.
    • It seeks to provide retirement benefits to all citizens of India, even from the unorganized sectors. 
    • The NPS has been gradually growing in size and now manages ? 5.78 crore of savings and 4.24 crore accounts in multiple savings schemes.
    • Structure: The scheme is structured into two tiers:
      • Tier-I account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.
      • Tier-II account: This is a voluntary withdrawable account that is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.
    • Eligibility under National Pension System: Any individual citizen of India (both resident and Non-resident) in the age group of 18-65 years (as on the date of submission of NPS application) can join NPS.
      • The OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) card holders and HUFs are not eligible for opening of NPS accounts.

    Changes Proposed by PFRDA

    • To avoid forcing people into an unattractive investment, the regulator has now proposed to give members a choice to retain 40% of their corpus with the NPS fund managers even after retirement.
      • This will allow them to get better returns, and these savings can be paid out to members over 15 years through something like the systematic withdrawal plan offered by mutual funds.
      • This change shall need Parliament’s nod, the expansion of the annuity-free withdrawal limit from ?2 lakh to ?5 lakh is being done immediately. 
    • At least three more fund managers are expected to be appointed soon, which will take the total managers to ten.
    • Age restrictions to join the NPS are also being eased to allow people to join the scheme up to the age of 70 years, from 65 years earlier. 
      • The reason is that over 15,000 recent NPS members joined after the age of 60 since the age limit was raised to 65 years from 60 years in 2017.

    Reasons for overhauling National Pension System

    • Falling interest rates and poor returns offered by annuity products had triggered complaints from some members and experts about the compulsory annuitisation clause. 
    • The law regulating the NPS allows members to withdraw just 60% of their accumulated savings at the time of retirement.
    • With the remaining 40%, it is mandatory to buy an annuity product that provides a fixed monthly income to retirees till their demise.
    • It will allow members to get better returns, and these savings can be paid out to members over 15 years through something like the systematic withdrawal plan offered by mutual funds.

    Advantages of NPS

    • Flexible: NPS offers a range of investment options and a choice of Pension Fund Manager (PFMs) for planning the growth of your investments in a reasonable manner.
      • Individuals can switch over from one investment option to another or from one fund manager to another subject, of course, to certain regulatory restrictions. The returns are totally market-related.
    • Simple:  Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. 
    • Portable: NPS provides seamless portability across jobs and across locations, unlike all current pension plans, including that of the EPFO. It would provide a hassle-free arrangement for individual subscribers.

    Achievements 

    • The NPS has been gradually growing in size and now manages ?5.78 lakh crore of savings and 4.24 crore accounts in multiple savings schemes. 
      • Of these, over 3.02 crore accounts are part of the Atal Pension Yojana (APY), a government-backed scheme for workers in the unorganised sector that assures a fixed pension payout after retirement. 
      • The rest constitute voluntary savings from private sector employees and self-employed individuals, for whom some significant changes are on the anvil.

    Pension Fund Regulatory and Development Authority (PFRDA)

    • It is the Statutory body under the umbrella of the Ministry of Finance.
    • It was established by an enactment of the Parliament, to regulate, promote and ensure orderly growth of the National Pension System (NPS) and pension schemes to which this Act applies. 

    Source :TH