National Pension System or New Pension Scheme (NPS)

Introduction

Pension plans provide financial security and stability during old age when people don't
have a regular source of income. Retirement plan ensures that people live with pride and without
compromising on their standard of living during advancing years. Pension scheme gives an
opportunity to invest and accumulate savings and get lump sum amount as regular income
through annuity plan on retirement.

According to United Nations Population Division World's life expectancy is expected to

reach 75 years by 2050 from present level of 65 years. The better health and sanitation
conditions in India have increased the life span. As a result number of post-retirement years
increases. Thus, rising cost of living, inflation and life expectancy make retirement planning
essential part of today's life. To provide social security to more citizens the Government of India
has started the National Pension System

The National Pension System or New Pension Scheme (NPS) is a defined contribution
based pension system launched by Government of India with effect from 1 January 2004. As a
first step towards instituting pension reforms, Government of India moved from a defined benefit
pension to a defined contribution based pension system. Apart from offering different investment
options to employees, this scheme would help government of India to reduce its pension
liabilities. Unlike existing pension fund that offered assured benefits, NPS has defined
contribution and individuals can decide where to invest their money. The scheme is structured
into two tiers:

 Tier-I account: This is the non-withdrawable permanent retirement account into which
the regular contributions made by the subscriber are credited and invested as per the
portfolio/fund manager chosen of the subscriber.
 Tier-II account: This is a voluntary withdrawable account which 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 required.

Regulator

Pension Fund Regulatory and Development Authority (PFRDA) is the regulator for the
NPS. PFRDA was established by the Government of India on 23 August 2003 to promote old
age income security by establishing, developing and regulating pension funds. PFRDA has set up
a Trust under the Indian Trusts Act, 1882 to oversee the functions of the Pension Fund Managers
(PFM).

Coverage and eligibility

 NPS was made available to all citizens of India on voluntary basis and is mandatory for
employees of central government (except armed forces) appointed on or after 1 January 2004.
All Indian citizens between the age of 18 and 55 can join the NPS.

Tier-I is mandatory for all Govt. servants joining Govt. service on or after 1.1.2004. In Tier I,
Govt. servants will have to make a contribution of 10% of his Basic Pay, DP and DA which will
be deducted from his salary bill every month. The Govt. will make an equal matching
contribution. Since 1 April 2008, the pension contributions of Central Government employees
covered by the NPS are being invested by professional Pension Fund Managers in line with
investment guidelines of Government. However, there will be no contribution from the
Government in respect of individuals who are not Government employees. The contributions and
returns thereon would be deposited in a non-withdrawable pension account.

In addition to the above pension account, each individual can have a voluntary tier-II
withdrawable account at his option. Government will make no contribution into this account.
These assets would be managed in the same manner as the pension. The accumulations in this
account can be withdrawn anytime without assigning any reason

Features of NPS

1. The New Pension Scheme will work on defined contribution basis and will have two tiers
– Tier I and Tier II.
2. Tier-I is mandatory for all Govt. servants joining Govt. service on or after 1.1.2004.  In
Tier I, Govt. servants will have to make a contribution of 10% of his Basic Pay, DP and
DA which will be deducted from his salary bill every month by the PAO concerned.  The
Govt. will make an equal matching contribution. Tier I contribution will be kept in a non
withdrawal Pension Tier I account.
3. Tier II will be optional and at the discretion of Govt. servants.  Tier II contributions will
be kept in a separate account that will be withdrawal at the option of Govt. servant.  The
scheme of voluntary contribution under Tier II will not be made operative during the
period of interim arrangement and therefore no recoveries will be made from the salaries
of the employees on this account.
4. The existing provisions of Defined Benefit Pension and GPF would not be available to
new Govt. servants joining Govt. service on or after 1.1.2004.
5. An independent Pension Fund Regulatory and Development and Authority (PFRDA) will
regulate and develop the pension market.
6. As an interim arrangement till such time the statutory PFRDA is set up and interim
PFRDA has been appointed by issuing an executive order by Ministry of Finance(DEA).
7. It has also been decided that Tier II will not be made operative during interim period.
8. Till the regular Central Record Keeping agency and Pension Fund Managers all
appointed and the accumulated balances under each individual are transferred to them, it
has been decided that such amounts rep[resenting the contributions made by the Govt.
servants will be kept in the Public Account of India .  This will be a temporary
arrangements as announced by the Govt.
9. A Govt. servant can exit at or after the age of 60 years from Tier I of the Scheme.  At
exit, it would be mandatory for him to invest 40% of pension wealth to purchase an
 annuity (from an IRDA regulated Life Insurance Company), which will provide for
pension for the life time of the employee and his dependent parents/ employee.  In case of
Govt. servants who leave the scheme before attaining the age of 60, the mandatory
annuitisation would be 80% of the pension wealth.
10. Recoveries towards Tier I contribution will start from salary of the month following the
month in which the Govt. servant has joined service.  Therefore, no recovery will be
effected for the month of joining.
11. No deductions will be made towards GPF contribution from the Govt. servants joining
the service on or after 1.1.2004 as the GPF scheme is not applicable to them.
12. It has been decided that pending formation of a regular Central Record Keeping Agency,
Central Pension Accounting office(CPAO) will function as the Central Record Keeping
Agency for the above scheme.

Benefits/Advantages of NPS

1. Flexible- NPS offers a range of investment options and choice of Pension Funds (PFs) for
planning the growth of the investments in a reasonable manner and monitor the growth of
the pension corpus. Subscribers can switch over from one investment option to another or
from one fund manager to another.
2. 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. The scheme is structured into two tiers:
3. Portable- NPS provides seamless portability across jobs and across locations. It would
provide hassle-free arrangement for the individual subscribers while he/she shifts to the
new job/location, without leaving behind the corpus build, as happens in many pension
schemes in India.
4. Well Regulated- NPS is regulated by PFRDA, with transparent investment norms, regular
monitoring and performance review of fund managers by NPS Trust. The account
maintenance costs under NPS are the lowest as compared to similar pension products
across the globe. While saving for a long-term goal such as retirement, the cost matters a
lot as the charges can shave off a significant amount from the corpus over 35-40 years of
investment period.
5. Dual benefit of Low Cost and Power of compounding: Till the retirement, pension wealth
accumulation grows over the period of time with a compounding effect. The account
maintenance charges being low, the benefit of accumulated pension wealth to the
subscriber eventually become large.
6. Ease of Access: The NPS account is manageable online. An NPS account can be opened
through the eNPS portal

OLD PENSION SCHEME NEW PENSION SCHEME

The OPS is a defined pension scheme of Govt. NPS is a contributory pension scheme where
of India. There is no need for contributions the employee and the employer contribute their
respective shares.

Pension payout post-retirement is based on last The government contributes 14 per cent
drawn salary and length of service. Hence it is towards the employees’ NPS accounts while
referred to as a ‘defined benefit system’ employees contribute 10% of their basic salary.

Upon retirement, employees receive 50 percent
of their last drawn basic pay plus dearness
allowance or their average earnings in the last
ten months of service, whichever is more
advantageous to them
The expenditure incurred on the OPS is borne
by the government
NPS is regulated by the Pension Fund
Regulatory and Development Authority
(PFRDA).
Pension payout post-retirement depends on the
returns generated by the corpus accumulated
during the working years of the employee.

Only government employees were eligible for NPS covers the private sector and not just
receiving a post-retirement pension under OPS government sector
regime

# The Government of Mizoram followed the New Pension Scheme from 1st September 2010.