IC 83 - Compressed-4

- - SUMN.
ARY
CHAPTER 5
f) Present value of obligation (PVO) PVO is present value of benefits payable

on exit. It refers to actuarial liability.
g) Fair value of plan assets is the amount at which a~ asset could be exchanged
or a liability settled between knowledgeable part1es.
h) Past Service Cost comes into picture when an entity introduces a defined
benefit plan or makes some changes to an existing plan, which results in
increase of PVO for employees' service in past periods which has to be
accounted in current period.
i) Current Service Cost is the cost which arises because PVO increase due to
the service rendered by the employees in the current period. It includes
employee's benefits which are not vested.
j) Interest Cost arises because the benefits are one period closer to
settlement. This is arrived at by multiplying the discount rate as determined
at the start of the period by 'PVO' at the beginning of the period.
k) Expected Return on Plan Assets is the net return. It comprises of interest,

dividend and other revenue derived from the plan assets and any realised or
unrealised gain on the plan assets.
l) When there is substantial decrease in the number of employees as in the

case of a unit shutting down or otherwise curtailment arises.
m) A settlement occurs when a plan is permanently settled, s.ay, by paying lump

sum amount and plan ceases to exist.
n) The objective Indian Accounting Standard (lnd AS) 19 Standard is to

prescribe the accounting and disclosure for employee benefits. The Standard
requires an entity to recognise:
i. A liability when an employee has provided service in exchange for

employee benefits to be paid in the future; and
ii. An expense when the entity consumes the economic benefit arising from
service provided by an employee in exchange for employee benefits.
o) Under defined benefit plans:
i. The entity's obligation is to provide the agreed benefits to current and

former employees; and
ii. Actua~al risk .and investment risk fall, in substance, on the entity. If
act~a~al ~ ~~vestment experience are worse than expected, the
ent1ty s obhgat1on may be increased.
168
Scanned by CamScanner
suMMARY CHAPTER S
p) Accounting for defined benefit plans is complex because actuarial

assumptions are required to measure the obligation and the expense and
there is a possibility of actuarial gains and losses.
q) Multi-Employer Plans are post-employment plans other than state plans that
pool the assets of various entities that are not under common control and
use those assets to provide benefits to employees of more than one entity.
r) Other Long-term Employee Benefits include employee benefits other than

short-term employee benefits, post-employment benefits, and termination
benefits.
s) Termination Benefits are Employee benefits provided in exchange for the

termination of an employee's employment, as a result of either:
L An entity's decision to terminate an employee's employment before the

normal retirement date
ii. An employee's decision to accept an offer of benefits in exchange for

the termination of employment.
CHAPTER 6
INVESTMENT PATTERN FOR RETIREMENT SCHEMES
IChapter Introduction
The Employees' Provident Fund came into existence with the promulgation of
the Employees' Provident Funds Ordinance on the 15th November, 1951. It was
replaced by the Employees' Provident Funds Act, 1952. It is now referred as
the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 which
extends to the whole of Indian except Jammu and Kashmir.
The Act and Schemes framed there under are administered by a tri-partite
Board known as the Central Board of Trustees, Employees' Provident Fund,
consisting of representatives of:
a) Government (Both Central and State),

b) Employers, and
c) Employees
The Board administers a contributory provident fund, pension scheme and an

insurance scheme for the workforce engaged in the organised sector in India. It
is one of the world's largest organisations in terms of clientele and the volume
of financial transactions undertaken by it. The Board is assisted by the
Employees' PF Organization (EPFO), consisting of offices at 120 locations across
the country. The EPFO is under the administrative control of Ministry of Labour
and Employment, Government of India.
The Board operates three schemes:
a) The Employees' Provident Funds Scheme 1952 (EPF)

b) The Employees' Pension Scheme 1995 (EPS)
c) The Employees' Deposit Linked Insurance Scheme 1976 (EDLI)
This chapter contains details about EPFO fund investment patterns and its fund
managers.
[ Learntna OUtcomes
A. Investment pattern
B. Multi Fund Management in EPFO
C. EPFO Fund Managers
D. Investment of Pension Funds
CHAPTER 6
- -- -- -
IA. Investment Pattern
J
Retirement Benefits Funds, for investment purposes, can be grouped under two
broad classifications viz. Privately Managed and Government Managed Funds.
The Provident Fund may be either privately managed or Government Managed

Fund, the Gratuity Fund and Superannuation Fund may be privately managed or
Insurer managed etc. The Statute provides for creation of separate Trust to
manage these funds outside the government establishment. The guidelines for
pattern of investment for each of them is issued by various stake holders viz.
Central Board of Direct Taxes (CBDT), Insurance Regulatory and Development
Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA)
etc. The guidelines are constantly up dated to match with the environment.
The Ministry of Finance has published fresh changes to the existing pattern of
investment for self-managed Non - EPFO regulated Provident Funds, Self-
Managed Gratuity Funds and Superannuation funds. This is not applicable to
Exempt (EPFO regulated) Trusts.
New Investment Pattern for Non-Government Provident Funds,

Superannuation Funds and Gratuity Funds With Effect From 29th May, 2015
The excerpt from the press release issued by Ministry is reproduced for ready
reference. Government notifies the Investment Pattern for Non-Government
Provident Funds, Superannuation Funds and Gratuity Funds. This is reviewed
from time to time and revisions are effected based on the developments in the
financial market and economy. The investment pattern was last revised on
14thAugust, 2008 and was to be made effective from 1st April, 2009. The new
pattern is to enlarge the list of eligible securities in which pension funds and
provident funds may invest and include exchange traded funds, debt mutual
funds and asset backed securities. A Committee on investment pattern for
pension and insurance sector was constituted by the Department of Financial
Services, Ministry of Finance (DFS) under the Chairmanship of Shri G. N. Bajpai,
Ex-Chairman of UC and SEBI, which submitted its report in December, 2013. The
Committee inter alia, mad~ certain recommendations regarding revising the
Investment Pattern to provtde greater flexibility to subscribers to maximise
returns as also to provide long term resources to productive sectors in the
economy.
tNVES"l!.'f~_!_PATTER.N
--- _ __ CHAPTER 6
The revised investment pattern explicitly recognises the fiduciary responsibility

of the Trustees and the need for the exercise of due diligence by them and
provides sound and objective criteria to them to select any financial
instrument. Further, it also gives them greater flexibility in terms of a wider
variety of financial instruments as well as greater freedom to manage the
portfolio, in terms of newer instruments and greater flexibility in investment
limits. The changes in the new investment pattern, inter alia, include:
i. providing minimum and maximum limits for Central Government Securities,

State Government Securities, Government Guaranteed Securities (with a
separate maximum limit of not in excess of 10%) and units of gilt Mutual
Funds, forming part of a single category and allowing investment up to 50%
I, of the investible funds, instead of 55% under the earlier Investment Pattern
of 2008;
ii. Providing a mm1mum investment ceiling for the categories of (a)

Government Securities, (b) debt securities and (c) the equity and equity
related instruments;
iii. providing new category of instruments, such as, Index Funds, Exchange
Traded Funds, debt mutual funds and asset backed securities and
instruments, such as, the infrastructure debt funds, real estate investment
trusts, Infrastructure Investment Trusts, Basel Ill compliant tier-1 bonds of
banks and exchange traded derivatives with the sole purpose of hedging;
iv. permitting investment in term deposit receipts of even less than one year
duration issued by scheduled commercial banks subject to the specified
financial criteria; and
v. Prescribing investment of minimum 5% and up to 15% of the investible funds

in equity and equity related instruments.
vi. Strengthening credit rating requirements for some financial instruments

from "investment grade" to "AA" category, keeping the protection of
interests of subscribers, in view.
Further, it has been provided that,-
i. the prudent investment of the Funds of a trust I fund within the prescribed
pattern is the fiduciary responsibility of the Trustees and needs to be
exercised with appropriate due diligence. The Trustees would accordingly be
responsible for investment decisions taken to invest the funds.
ii. the trustees will take suitable steps to control and optimize the cost of
management of the fund.
iii. the trust will ensure that the process of investment is accountable and
transparent.
CHAPTER 6
iv. It will be ensured that due diligence is carried out to assess risks associated
with any particular asset before investment is made by the fund in that
particular as·set and also during the period over which it is held by the fund .
The requirement of ratings as mandated in this notification merely intends
to hmit the risk associated with investments at a broad and general level.
Accordingly, it should not be construed in any manner as an endorsement for
investment in any asset satisfying the minimum prescribed rating or a
substitute for the due diligence prescribed for being carried out by the fund
I trust.
v. the trust 1 fund should adopt and implement prudent guidelines to prevent
concentration of investment in any one company, corporate group or
sector.
Instruction to this effect was issued by the EPFO vide their communication
reference F.NO.IHO/IMC/132/Patternl2015112937 dated 26.06.2015. The
gazette notification was issued on 29th May 2015. The excerpts of this
notification are reproduced hereunder.
Every employer in relation to an establishment exempted under clause (a) or

clause (b) of sub-section (i) of Section 17 of the said Act or in relation to any
employee or class of employee exempted under paragraph 27, or as the case
may be, paragraph (27A) of the Employees' Provident Fund Scheme, 1952 shall
transfer the monthly provident fund contribution in respect of the
establishment or, as the case may be of the employee or class of employees
within fifteen days of the close of the month to the Board of Trustee duly
constituted in respect of that establishment and that the said Board of Trustee
shall invest every month with in a period of two weeks from the date of receipt
of the said contributions from the employee, the provident fund accumulations
in respect of the establishment or as the case may be, of the employee, or class
of employee that is to say, the contributions and interest as reduced by any
obligatory outgoings in accordance with the following pattern, namely:-
INVESTMENT PATTERN CHAPTER 6
Percentage
Category amount to
No Category/Sub Category be invested
(i) Government Securities and Related investments Minimum
45% and up
(a) Government securities, to 50%
(b) Other securities (as defined in Section 2 (h) of

the Securities Contract (Regulations) Act, 1956)
the principal whereof and interest whereon is fully
and unconditionally guaranteed by the Central
Government or any State Government
The portfolio invested under this sub-category of
securities shall not be in excess of 10% of the total
portfolio of the fund.
(c) units of mutual funds set up as dedicated funds

for investment in Government securities and
regulated by the Securities and Exchange Board of
India:
Provided that the portfolio invested in such mutual

funds shall not be more than 5%of the t otal portfolio
of the fund at any point in time andi fresh
investments made in them shall not exceed 5%
of the accretions invested in the year
(ii) Debt instruments and Related Investments Minimum
35% and up
(a) Listed (or proposed to be listed in case of fresh to 45%
issue) debt securities issued by bodies corporate,
including banks and public financial institutions
('Public Financial Institutes') as defined under
Section 2 of the Companies Act, 2013), which have a
minimum residual maturity period of three years
from the date of investment.
(b) Basel Ill Tier-1 bonds issued by scheduled

commercial banks under RBI Guidelines.
Provided that in case of initial offering of the bonds
the investment shall be made only in such
Tier-1 bonds which are either listed or are proposed
to be listed.
Provided further that investment shall be made in

such bonds of a scheduled bank from the secondary
market or from subsequent placement only if the
existing Tier-1bonds are listed and regularly traded
177
([ST M£}(T pA. TT[R)c
CHAPTER b - · - - - -- - --- -- ···- - --- --
Total portfolio invested in this sub-cat~ry, at any I
time, shalt not be more than 2% of the total portfolio
of the fund.
No investment in this sub -cat~ in init ial offerings
shalt exceed 20% of the initial offering and further,
the aggregate value of such bonds held by tlhe fund
shalt not exceed 20% of such bonds issued tilt that
point in time by that Bank.
(c) Rupee Bonds having an outstanding maturity of at

least 3 years issued by institutions of the
International Bank for Reconstruction and
Development, International Finance Corporation and
the Asian Development Bank,
(d) Term Deposit Receipts of not less than one year

duration issued by scheduled commercial banks,
which satisfy the following conditions on the basis of
the published annual report(s) for the most recent
years, as required to have been published by then
under the taw:
i. Have declared profit in immediately three

preceding financial years;
ii. Have maintained a minimum Capital to Risk

Weighted Assets Ratio of 9% or as mandated by
prevailing RBI norms, whichever is higher;
iit Have net non-performing assets of not more than

4% of the net advances;
iv. Have minimum net worth of not less than Rs.200

crore.
(e) Units of Debt mutual Funds regulated by

Securities and Exchange Board of India
Provided that fresh investment in Debt mutuail Funds

shall not be more than 5% of the accretions invested
in the year and the portfolio invested in them shall
not exceed 5% of the total portfolio of the fund at
any point in time.
178 IC-83 GltOUP INSUft.UIC.E A.NO RETl~T 8ENEEFITS
.. -- ---------·-------- - - -- -----···-
INVESTMENT PATIERN CHAPTER 6
(f) The following infrastructure related debt

instruments:
(i) Listed (or proposed to be listed in case of fresh

issue) debt securities issued by body corporate
Engaged mainly in the business of development or
operation of infrastructure or construction/ finance
of low coast housing.
Further this category shall also include securities
issued by Indian Railways or any of the body
corporate in which it has majority shareholding.
This category shall also include securities issued by
any Authority of the Government which is not a body
corporate and has been formed solely with the
purpose of promoting development of infrastructure.
It is further clarified that any structural obligation
undertaken or letter of comfort issued by the Central
Government, a State Government, Department of
Railways or any Authority of Government, for any
security issued by a body corporate engaged in the
business of infrastructure, which notwithstanding the
terms in letter of comfort of the obligation
undertaken, fails to enable its inclusion as security
converged under category (i) (b) above,
Shall be treated as an eligible security under this
sub-category.
(ii) Infrastructure and affordable housing; Bonds
issued by any scheduled commercial bank, which
meets the conditions specified in category (ii) (d)
above
(iii) Listed (or proposed to be listed in case of fresh

issue) securities or units issued by Infrastructure debt
funds operating as a Non· Banking Financial Company
regulated by Reserve Bank of India.
(iv) Listed (or Proposed to be listed in case of fresh

issue) units issued by infrastructure Debt Funds
operating as a Mutual Fund regulated by Reserve
Bank of India
It is clarified that, barring exceptions mentioned
above, for the purpose of this sub-category (f), a
sector shall be treated as part of infrastructure as
per Government of India's harmonized master-list of
infrastructure sub-sectors.
IC-83 GROUP INSURANCE AND RETIREMENT BENEEFITS 179
CHAPTER b
- · - ·-· --
M"IESTIItDif PA T'"I .f )r
Provided that the investment under sub-cat~

(a), (b) and (f) (i) to (iv) of this category No. (ii) shalt
be made only in such securities whkh have minimum
AA rating or equivalent in the applkable rating scale
from at least two credit rating agencies registered
with Securities and Exchange Board of India (Credit
Rating Agency) Regulation, 1999. Provided further
that in case of sub category (f) (iii ) the rating shall
relate to the Non-Banking Financial company and for
the Sub category (f) (iv) the rating shall relate to the
investment in eligible securities rated above
investment grade of the scheme of the fund .
Provided further that if the securities/ entities have

been rated more than two rating agencies the two
lowest of all the ratings shalt be considered.
Provided further that investment under this cat~egory

requiring a minimum AA rating. As specifled above,
shall be permissible in securities having investment
grade rating below AA in case the risk of default fOI'
such securities is fully cO'Iered with Credit Default
Swaps (CDSs) issued under Guidelines of the Reser.-e
Bank of India and purchased along with the
underlying securities.
Purchase amount of such swaps shall be considered
to be investment made under this category.
For sub-category (c), a single rating of AA or above
by a domestk or international rating agency will be
acceptable. I
It is clarified that debt securities covered under
category (i) (b) above are excluded from this
catquo 1 (ii ).
(iii) Short-term Debt Instruments and R.&Ated up to 5"'
In-vestments
(a) l#oney maritet instruments
Provided that investment in commercial paper issued

by body corporate shalt be made only in such
instruments which have minimum rat\"9 of A1• by at
least two c.redit ratint agencies felisteored with
Securities and Exchanle BoArd of India.
Provided further that if commercial paper has been

rated by more than two rating aeencie-5. the two
l~t of the ratintS shalt be consideted.
110
lf'NESTMtN I I' A I . .." ' . I.MA l' I t K b
Provided further that investment in this sub-category

in Certificates of Deposit of up to one year duration
issued by scheduled commercial Banks, will require
the bank to satisfy all conditi ons mentioned in
category (ii) (d) above.
(b) Units of liquid mutual funds regulated by

Securities and Exchange Board of India.
(c) Term Deposit Receipts of up to one year duration

issues by such scheduled commercial banks which
satisfy all conditions mentioned in category (ii) (d)
above.
(iv) Equities and Related Investments A Mini mum
of 5% and
(a) Shares of body corporate listed on Bombay Stock up to 15%
Exchange (BSE) or National Stock Exchange (NSE),
which have;
(i) Market capitalization of not less than Rs. 5000

crore as on the date of investment; and
(ii) Derivatives with the shares as underlying traded

in either of the two stock exchanges.
(b) Units of mutual funds regulated by SEBI, which

have minimum 65% of their investment in shares of
body corporate listed on BSE or NSE.
Provided that the aggregate portfolio invested in

such mutual funds shall not be in excess of 5% of the
total portfolio of the fund at any point in time and
the fresh investment in such mutual funds
Shall not be in excess of 5% of the fresh accretions
invested in the year.
(c) Exchanged Traded Funds (ETFs)/lndex Funds

regulated by Securities and Exchange Board of India
that replicate the portfolio of either BSE Sensex
Index or NSE Nifty 50 Index
(d) ETFs issued by SEBI regulated mutual funds

constructed specifically for disinvestment of
shareholding of the Government of India in body
corporate.
-
-,
181
-
IC·83 GROUP INSURANCE AND RETIREMENT BENEEFITS
,I
INVESTMENT PATIERN
CHAPTER 6
(e) Exchange traded derivatives regulated by

Securities and Exchange Board of India having the
underlying of any permissible listed stock or any of
the permissible indices, with the sole purpose of
hedging.
Provided that the portfolio invested in derivatives in

terms of contract value shall not be in excess
of 5% of the total portfolio invested in sub-categories
(a) to (d) above
(v) Asset Backed, Trust Structured and Miscellaneous Upton 5%
Investments limit
(a) Commercial mortgage based Securities or

Residential mortgage based securities.
(b) Units of securities issued by the Real Estate

Investment Trusts regulated by Securities and
Exchange Board of India,
(c) Asset Backed Securities regulated by Securities

and Exchange Board of India
(d) Units of Infrastructure Investment Trusts

regulated by Securities and Exchange Board of India.
Provided that investment under this category No. (v)

Shall only be in listed instruments or fresh issues that
are proposed to be listed.
Provided further that investment under this category

shall be made only in such securities which have
minimum AA or equivalent rating in the applicable
rating scale from at least two credit rating agencies
registered by Securities and Exchange Board of India
under Securities and Exchange Board of India (Credit
that in case of sub categories (b) and (d) the ratings
shall relate to the rating of the sponsor entity
floating the trust.

been rated by more than two rating agencies, the
Two lowest of the rating shall be considered.
182 IC·8l GROUP INSURANCE AND RETIREMENT BENEEFITS
t ---- . ~TTER~
-INVESTMENI - ·-· - ·- ·- -
CHAPTER 6
2. Fresh accretions to the fund wilt be invested in the permissible categories

specified in this investment pattern in a manner consistent with the above
specified maximum permissible percentage amounts to be invested in each
such. Investment category, while also complying with such other restrictions
as made applicable for various sub-categories of the permissible
investments.
3. Fresh accretions to the funds shall be the sum of un-invested funds from the
past, receipts like contributions to the funds, dividend/interest/commission,
and maturity amounts of earlier investments etc., as reduced by obligatory
outgo during the financial year.
4. Proceeds arising out of exercise of put option, tenure or asset switch or

trade of any asset before maturity can be invested in any of the permissible
categories described above in such a manner that at any given point of time
the Percentage of assets under that category should not exceed the
maximum limit prescribed for that category and also should not exceed the
maximum limit prescribed for the sub-categories, if any. However, asset
switch because of any RBI mandated Government debt switch would not be
covered under these restrictions.
5. Turnover ratio (the value of securities traded in the year I average value of
the portfolio at the beginning of the year and at the end of the year) should
not exceed two.
6. If for any of the instruments mentioned above the rating falls below the
minimum permissible investment grade prescribed for investment in that
instrument when it was purchased, as confirmed by one credit rating
agency, the option of exit shall be considered and exercised, as appropriate,
in a manner that is in the best interest of the subscribers.
7. On these guidelines coming into effect, the above prescribed investment

pattern shall be achieved separately
8. The investment of funds should be at arm's length, keeping solely the

benefit of the beneficiaries in mind. For instance, investment (aggregated
across such companies/organizations described herein) beyond 5% of the
fresh accretions in a financial year will not be made in the securities of a
companyI organization or in the securities of a company I organization in
which such a company/organization holds over 10% of the securities issued,
by a fund created For the benefit of the employees of the first company 1
organisation, and the total volume of such investments will not exceed 5% of
t~~ total portfolio of the fund at any time. The prescribed process of due
d1l1gence must be strictly followed in such cases and the securities in
Question must be permissible investments under these guidelines.
9.
i. The prudent investment of the Funds of a trust/ fund within the prescribed
pattern is the fiduciary responsibility of the Trustees and needs to be
exercised with appropriate due diligence. The Trustees would accordingly be
responsible for investment decisions taken to invest the funds.
ii. The trustees will take suitable steps to control and optimize the cost of
management of the fund.
Iii. The trust will ensure that the process of investment is accountable and
transparent.
iv. It will be ensured that due diligence is carried out to assess risks associated
with any particular asset before investment is made by the fund in that
particular asset and also during the period over which it is held by the fund.
The requirement of ratings as mandated in this notification merely intends
to limit the risk associated with investments at a broad and general level.
Accordingly, it should not be construed in any manner as an endorsement for
investment in any asset satisfying the minimum prescribed rating or a
substitute for the due Diligence prescribed for being carried out by the
fund / trust.
v. The trust/ fund should adopt and implement prudent guidelines to prevent
concentration of investment in any one company, corporate group or sector.
10.1f the fund has engaged services of professional fund/asset managers for
management of its assets, payment to whom is being made on the basis of
the value of each transaction, the value of funds invested by them in any
mutual Funds mentioned in any of the categories or ETfs or Index Funds
shall be reduced before computing the payment due to them in order to
avoid double incidents of costs. Due caution will be exercised to ensure that
the same investment are not churned with a view to enhancing the fee
payable. In this regard, commissions for investments in Category (iii)
instruments will be carefully regulated, in particular.
1. Investment pattern
The New Investment Pattern No. S.O. 3450(E) dated 21st November, 2013
notified by Ministry of Labour and Employment, Government of India is as
follows:
In exerdse of the powers conferred by sub-paragraph (1) of paragraph 52 of the

Employees· Provident Funds Scheme, 1952 and i n supersession of the
notification of the Government of India in the Ministry of Labour No. 5.0. 2125
dated the 9th July, 2003 the Central Government hereby directs that all
incremental accretions belonging to the Fund shall be invested in accordance
with the following pattern namely:
18.. IC·8l GROUP INSURANCE AND RETIREMENT BENfffiTS
...
• INVESTMfNT PATT£RH CHAPTER 6
Table 1: Investment pattern and percentaae amount to be tnvested
S. No. Investment Pattern Percentqe

amount to
be tnvested
(a) Government securities
(b) Other securities, the principal whereof and

interest whereon is fully and unconditionally
guaranteed by the Central Government or any State
Gov·e rnment except those covered under (ii) (a)
below.
(i) Up to 55
(c)Units of mutual funds set up as dedicated funds
for investment in Government securities and
regulated by the Securities and Exchange Board of
India (SEBI);
Provided that the exposure to a mutual fund shall
not be more than 5% of the total portfolio at any
_point of time.
(a) Debt securities with maturity of not less than
three years tenure issued by Bodies Corporate
induding banks and public financial institutions
Provided that at least 75% of the investment in this
category is made in instruments having an
investment grade rating from at least one credit
agency.
(b) Term Deposit Receipts of not less than one year
duration issued by scheduled commercial banks.
Provided that the scheduled commercial banks must
meet conditions of;
./ Continuous profitability for immediately
(ii) Up to 55
preceding three years ;
./ Maintaining a minimum Capital to Risk Weighted
Assets Ratio of 9%;
./ Having net non-performing assets of not more
than 2% of the net advances;
./ Having a minimum net worth of not less than Rs .
200 crores.
(c) Rupee Bonds having an outstanding maturity of
at least 3 years issued by Institutions of the
International Bank for Reconstruction and
Development, International Finance Corporation and
the Asian Development Bank.
INVESTMEHT PAITEilN
CHAPTER 6 ----- --- -- -·-~-
-~----·-- ------
Money market instruments including units of money Up to 5

(iii) market mutual funds
Shares of companies on which derivatives are
available in Bombay Stock Exchange (SSE) or
National Stock Exchange (NSE) or equity linked Nil
(iv)
scheme of mutual funds regulated by the Securities
and Exchange Board of India.
a) Government Securities as defined in Section 2(b) of the Securities

Contracts (Regulation) Act, 1956.
b) Securities· as defined in section 2(h) of the Securities Contracts

(Regulation) Act, 1956.
c) Public Financial Institutions' as specified under Section 4A of the

companies Act, 1956.
d) Any moneys received on the maturity of earlier i nvestments reduced by

obligatory outgoing shall be invested in same category.
e) Turnover Ratio (the value of Securities traded in the year/ average value
of the portfolio at the beginning of the year and the end of the year)
should not exceed 2.
f) If any of the instruments mentioned above are rated and their rating
falls below investment grade as confirmed by one credit rating agency
then the option of exit can be exercised.
g) The Investment pattern as envisaged above may be achieved by the end

of the financial year. However any volatility re-balancing at the end of
the year may be avoided.
h) It may be noted, however, that the investment of the Funds of a Trust is

the Fiduciary responsibility of the Trustees and needs to be exercised
with appropriate due diligence. Therefore, as such, the trustees are
solely responsible for the investment decisions taken in accordance with
the pattern of investment specified above.
2. summary
a) The Employees' Provident Fund Organisation (EPFO) will be allowed to
invest up to 55 per cent of its funds in debt securities issued by banks
and financial institution and other body corporates .
As per the practice, EPFO parks its funds in accordance with the
investment pattern notified by the labour ministry (described above).
Earlier, as per the investment pattern notified by the Ministry in July,

2003, EPFO was allowed to invest up to 30 per cent of funds in PSU debt.
b) The above notification will not be applicable to private PF trusts

regulated by EPFO. The Ministry would issue a separate notification for
these trusts as was done way back in 2003. There are around 2, 700 such
trusts which manage around Rs 2 lakh crore social security funds.
c) The Finance Ministry has long been pitching for investment of EPFO funds
in equity markets to maximise the yields on investments. However,
following strong opposition from unions against the volatile nature of
investments in stocks, EPFO did not opt for equity investment.
d) The investment pattern described above also allows EPFO to invest up to

5 per cent of its corpus into money market instruments, including units of
mutual funds.
e) The investment norms described above also provide for parking up to 55

per cent of the EPFO funds in a new category comprising government and
state bonds.
Earlier, the body was required to invest 25 per cent of funds in

government bonds and 15 per cent in state bonds.
f) EPFO has a subscribers base of over 5 crore across the country. It has
provided a rate return of 8.5 per cent on PF deposits in 2012-13.
ITest Yourself 1
~at is the amount upto which Employees' Provident Fund Organisation (EPFO)
1s allowed to invest its funds in debt securities issued by banks and financial
institution and other body Corporates?
I. Up to 10 percent
11. Up to 15 percent
Ill. Up to 35 percent
IV. Up to 55 percent
~~8~-~M~ul=ti~F~u~n=d~M~a~n=ag~e~m~e~n~t~in~E~
PF~O~----------------------J
1. Investment of EPFO
EPFO Provides Social Security to the organised work force of the country. This
security cover allows monetary benefits in lump sum as well as through monthly
accruals to the beneficiaries. This requires a smooth flow of money out of ever
growing fund. The growth of Fund has to happen in a way where the risk of
capital and interest loss is minimal. This is why tilt now EPFO's corpus is being
put to investment in fixed Income instruments which are considered safe.
These instruments could be the
a) Central Government Securities,

b) Central Government Guaranteed Securities, State Development loan,
State Guaranteed Securities, Public Sector undertaking, Public Sector
Financial Institution
All these instruments are for fixed periods and the returns are also fixed.
Moreover, EPFO's investment philosophy is HTM (Held till maturity).
2. Role of Fund Manager of EPFO
The role of Fund Manager of EPFO was initially handled by RBI. But, later it was
decided that RBI's role is not of a Fund Manager and EPFO had to move their
fund with the SBI for its management in 1995.
SBI were managing the investment under discretionary Fund Management where
the decision as to when to invest, where to invest and how to invest vested
absolutely with the Fund Manager.
3. Concept of Amortisation
EPFO's only requirement is to meet the percentage of investment in different

category of instruments at the close of the Financial Year. The percentage
allocation is done under the Pattern of investment itself which is approved by
the Central Government around the year 2000 the administered interest rate
started taking backseat and Government securities were made available through
market auction by the RBI.
With the interest rate cycle movement, the premium and discount on
Government Securities in secondary debt market became a normal practice.
This introduced a new kind of challenge before EPFO as to how to account for
the securities if there were differences between the Face Value and the
purchase price (Cost Price) of the securities. The concept of Amortisation was
introduced in 2005 and the Investment Fluctuation account was made dormant.
188 IC ·Sl GROUP INSURANCE AND RETIREMENT BENEEFITS
MULTl FUND MANAGEMENT IN EPFO CHAPTER 6
The declaration of rate of interest thus got a political dimension as well to be

addressed other than the real returns in prevailing hard core economic scenario.
4. Multiple Fund Managers
During low interest rate cycles when the real returns were falling, the
successive CBT meetings could not decide the rate of interest to be declared
because the real rates of return were getting even less than 8.5% against the
minimum demand@ of 9.5%.
Long deliberations in the CBT compelled to find ways to get an optimum return
at investment. One such suggestion was that of bringing in more professionalism
in the Fund Management by introduction of competition through selection and
appointment of Multiple Fund Managers. This has proven to be the turning point
subsequent to which EPFO executed through a comprehensive exercise of
Appointment of Multiple Fund Managers which involved:
a) Selecting New Fund Managers (HSBC AMC, ICICI Prudential AMC and
RCAML in addition to existing SBI)
b) Putting adequate safety net for the Fund transfer
c) Accounting each Rupee of investment
d) Appointing independent custodians for the securities etc.
This could be ensured by associating HDFC Bank for opening and operation of
Investments Accounts in the name of CBT, EPF for the three new Fund Managers
(ICICI Prudential AMC, Reliance Capital AMC and HSBC AMC) as well as the
custodian NC in the name of CBT, EPF of Securities purchased for CBT, EPF. SBI
continued to be the custodian for their invested securities.
The up gradation on the part of EPFO to successfully implement this task

involved:
a) Making available NOS. OM dealing platforms to all the FMs with the RBI.
b) Opening of new Demat account in the name of CBT EPF with CCIL.
c) Obtaining permission for Investment in CBLO (Collateral Borrowing and

Lending Obligation) for short term parking with not more than 5% of the
fund at any time, to take care of idling of Fund.
d) Setting up of Investment Monitoring Cell (IMC) manned by our own

officers headed by RPFC·1 Sh. K.L. Goyal and three RPFC-11 Sh. Rajiv
Bisht, Ms. Nidhi Singh and Sh. Brijesh Kumar Mishra and the same is
functioning.
I( .. A'1 t:DniiD IUI:1 • .., a ... ,..,.. • · · - - - · -- · . - ·- - -
MULTl FUND MAHACiEMENT IN EPfO
_CHAPTE~ 6 · -- - - - - - - -- --
e) IMC was equipped with market Intelligence software by Thomson Reuters

and News Wire 18.
f) A detailed investment Manual of EPFO was prepared in consultation with

CRISIL who is appointed as consultant for EPFO for assisting in
performance Evaluation of these portfolio Managers.
g) The concept of Concurrent Audit was introduced to audit the investment

decisions as contained in the Investment Manual, Concurrent Auditor will
help the IMC by giving their reports every fortnight.
h) The services of CRISIL as consultant were hired for providing adequate

technical support in Evaluation of the performance against a dynamic
benchmark which has been developed by CRISIL in consultation with IMC
of EPFO and the same is regularly updated in line with prevalent market
conditions and investment trends of our Portfolio managers.
i) Monthly and Quarterly performance evaluation of FMs is being done

regularly and the performance is placed for discussion and further
guidance before the F1C (Finance and Investment Committee of CBT).
j) Now the monitoring by the IMC has become more robust and at times
putti ng checks on improper investment decisions beforehand and has
been ensuring enhanced return at EPFOs corpus.
k) A very important role is being played by Investment Accounting Cell (lAC)

headed by Shri. V. Rangnath , RPFC-11, a dedicated officer who has been
instrumental in developing internal software with the active help of Sh.
S. K. Panda A.D. (IS) which was urgently required especially after the
introduction of Multiple fund managers, since there are now 55 reports
being sourced from SBI and HDFC as Bank, SBI and HDFC as custodians
and the reports from the 4 FMs on daily basis. This new software is able
to map and reconcile on daily basis.
Investment Monitoring Cell with Investment Accounting Cell is putting in place

active systems to the cause of vigilant monitoring for maximising the yield on
EPFO's corpus along with robust accounting for keeping accurate account of
each paisa of investment.
I Test Yourself 2
In which of the following securities is EPFO's corpus majorly invested?
I. Central Government Securities

II. Equities
Ill. Balanced Mutual funds
IV. Gold
190 IC·Sl C.ROUP INSURANCE AND RETlREMENT 8ENEEFITS
£PFU r vrw ~.=~-
LMAI' I t.l( 6
[c. EPFO Fund Manaprs

]
At present, Crisil is providing consultancy services to the EPFO.
The existing four ~~nd ~anagers of EPFO · SBI, HSBC AMC, Reliance Capital
Ltd and ICICI Secunt1es Pnmary Dealership · were appointed for a term of three
years beginning September 1 , 2011.
Among the four managers, SBI manages biggest chunk of fund with 35 per cent
of corpus fol'lowed by ICICI Securities Primary Dealership at 25 per cent. HSBC
AMC and Reliance Capital manages 20 per cent each .
In the last bi dding, Reliance Capital had quoted a fee of 4 paise per annum for
managing Rs 10,000, and was the second lowest bidder after ICICI Securities
Primary Dealership which quoted a rate of 3 paisa.
SBI had quoted a price of Re 1 per Rs 10,000 per annum whereas HSBC AMC's
rate was 36 paise.
The CBT had approved the appointment of Standard Chartered Bank as

custodian of securities of EPFO and Chandabhoy and Jassoobhoy of Mumbai as
external concurrent auditor for the body.
The EPFO had appointed multiple fund managers for the first time in July, 2008,
for earning better rate of return on deposits for its over five crore subscribers.
During the two·and·half·year tenure from September 17, 2008 to March 31,
2011, ICICI Prudential had provided highest yield (return) of 8. n per cent
' followed by HSBC AMC (8.64 per cent), SBI (8.61 per cent) and Reliance Capital
:l (8.57 per cent) against the benchmark yield of 8.52 per cent.
Before July, 2008, SBI was the sole fund manager for the retirement fund body
since its inception in 1952.
1. State Bank of India (SBI)
State Bank of India (SBI) is a multinational banking and financial services

company based in India. It is a government-owned corporation with its
headquarters in Mumbai, Maharashtra. As of December 2013, it had assets
1 of US$388 billion and 17,000 branches, including 190 foreign offices, making it
the largest banking and financial services company in India by assets.
f State Bank of India is one of the Big Four banks of India, along with ICICI
Bank, Punjab National Bank and Bank of Baroda.
SBI provides a range of banking products through its network ?f branches in

I· India and overseas, including products aimed at non-resident 1~1ans (NRis)._~81
has 1-4 regional hubs and 57 Zonal Offices that are located at Important c1t1es
I throughout India.
IC-U <iltOUft INSURANCE AND RETI~ IEHE£fiTS
191
L HAI' I t.H b
--·--
2. HSBC AJAC
Hongkong and Shanghai Banking Corporation (HSBC) Asset Management (India)

Private Limited is the Investment Manager to HSBC Mutual Fund, set up locally
by the HSBC Group. HSBC Mutual Fund is the brand name adopted by HSBC Asset
Management (India) Private Limited.
The business is working on ambitious plans to position itself as one of the

leading Private Sector Fund Managers in the Indian financial market · one of the
most promising markets in Asia. It also aims to expand its customer base by
extending its product range to include a wide variety of investment products
and enhance its reputation in India of being a provider of international quality
investment products and services.
3. Reliance Capital Ltd.
Reliance Capital, a constituent of CNX Nifty Junior and MSCI India, is a part of
the Reliance Group. It is one of lndia"s leading and amongst most valuable
financial services companies in the private sector.
Reliance Capital has interests in
a) Asset management and mutual funds;

b) Life and General insurance;
c) Commercial finance;
d) Equities and commodities braking;
e) Wealth management services;
f) Distribution of financial products;
g) Private equity;
h) Asset reconstruction ;
i) Proprietary investments and other activities in financial services.
Reliance Capital has a net worth of Rs. 12,563 crore (USS 2.0 billion) and total
assets of Rs. 44,048 crore (USS 7.1 billion) as on December 31, 2013.
... ICICI Securities Primary DNlership
Industria~ Cr~~t an~ Investment Corporation of India (ICICI) Securities Primary

Dealership L1m1ted 1s an acknowledged leader in the Indian fixed income and
money markets, with a strong franchise across the spectrum of interest rate
products and services - institutional sates and trading, resource mobilisation and
research.
It is one of the first e:ntiti~ to be gr~nted Primary Dealership license by RBI, 1-

Sec PO has made p10neenng contnbutions since inception to debt mark~t
development in India.
192
IC·Il GIIOUP INSURANCE AND RETIREME.HT 8EHEEfiTS
- INV£STMEN_! Of PENSION FUND~ - _
---- CHAPTER 6
The 1-Sec PO desks trade actively in government securities

. . •
swaps and
corporate
bonds markets. In each of these markets, 1t enJoys dominant ·t ·
. f . .f . t h f po5l 100
accountmg or a s1gm Jean s are o trading turnover. '
[Test Yourself 3
Who among the following provides consultancy services to the EPFO?
I. CARE
II. IRDA
Ill. Crisil
IV. SBI
ID. Investment of Pension Funds

1. Pension Fund Regulatory and Development Authority (PFRDA)
Pension Fund Regulatory and Development Authority was established by the

Government of India on 23rd August 2003 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. The mandate of PFRDA is development and regulation of
pension sector in India.
The pension fund is a fund established by an employer to facilitate and organise

the investment of employees' retirement funds contributed by the employer and
employees.
l Deflnttton
The pension fund is a common asset pool meant to generate stable growth over
the long term, and provide pensions for employees when they reach the end of
their working years and commence retirement.
Pension funds are commonly run by some sort of financial intermediary for the
company and its employees, although some larger corporations operate t~eir
pension funds in-house. Pension funds control relatively large amounts of cap1tal
and represent the largest institutional investors in many nations.
Pensions broadly divided into two sectors:
a) Formal sector Pensions

b) Informal sector Pensions
INVESTMENT Of PENSION fUNDS
CHAPTER 6
- - - - - -- ·- - - - - - --------- --
Diagram 1: Type of pensions
t
I
~
,...., . . . ~
Formal sector pensions · Informal sector pensions

lit., . . - . ' ' .j .... : ....... .. . h • ~
Formal sector pensions in India can be divided into tlhree categories; viz those
schemes that come under an Act or Statute, Government pensions and voluntary
pensions.
The National Pension System reflects Government's effort to find sustainable

solutions to the problem of providing adequate retirement income.
As a first step towards instituting pensionary reforms, Government of India

moved from a defined benefit pension to a defined contribution based pension
system by making it mandatory for its new recruits (except armed forces) with
effect from 1st January, 2004. Since 1 st April, 2008, the pension contributions of
Central Government employees covered by the National Pension System (NPS)
are being invested by professional Pension Fund Managers in line with
investment guidelines of Government applicable to non-Government Provident
Funds. NPS has been made available to every citizen from 1st May, 2009 on a
voluntary basis.
2. Investment guidelines for NPS Scheme
As a measure to optimise returns of the subscribers and with a view to ensure

quality investments in the interest of subscribers, it has been decided to amend
the investment guidelines applicable to NPS schemes. These are as follows:
INVESTMENT OF PENSION FUNDS CHAPTER 6
Table2: Investment guidelines for Government Sector NPS Schemes

(Applicable to Government Sector, Corporate CG and NPS Lite schemes of
NPS):
s. Category Investment Guidelines

no
(a) Government securities.
(b) Other securities, the principal whereof and interest
whereon is fully and unconditionally guaranteed by
the Central Government or any State Government except
~hose covered under (ii) (a) below.
(i) ~overnment (c) Units of mutual funds set up as

~ecurities ~edicated funds for investment in Government
(up to 55%) securities and regulated by the Securities and
Exchange Board of India. Provided that the exposure to
~ mutual fund shall not be more than 5% of the total
portfolio of G Sees in the concerned NPS Scheme at any
point of time.
CHAPTER 6
(a) Debt securities having a minimum residual maturit

riod of three years from the date of jnvestment by th
ension Fund issued by Bodies Corporate including ban
nd public financial institutions; Provided that the
·nvestment in this category is made in instruments havin
n investment grade rating from at least one credit ratin
gency. Apart from rating by an agency, PFMs shall
ndertake their own due diligence for assessment of ris
ssociated with the securities before investments.
(b) Term deposit Receipts of not less than one yea

uration issued by scheduled commercial banks.
rovided that the scheduled commercial banks must mee

onditions of
(i) continuous profitability for immediately preceding thr

ebt
(ii) ecurities
(up to 40%) (ii) maintaining a minimum Capital to Risk Weighted Asset
atio of 9%;
(iii) having net non-performing assets of not more than 2

f the net advances;
(iv) having a minimum net worth of not less than Rs. 2
(c) Rupee Bonds having an outstanding maturity of at leas

years issued by institutions of the International Bank fo
econstruction and Development, International Finane
orporation and the Asian Development Bank, Rated IDF
Infrastructure Debt funds), Rated ABS (Asset Back
ecurities) with the conditions applicable to debt securiti
·n (ii) (a) above.
d) Debt Mutual Funds as regulated by SEBI.
Money
Market ney market instruments including units of money marke
(iii) utual funds
Instrument
(up to 5%)
hares of companies on which derivatives are available in
bay Stock Exchange or National Stock Exchange o
(iv) Equity (up to quity linked schemes of mutual funds or Exchange Tra
15%) unds regulated by the Securities and Exchange Board o
ndia.
196 IC-83 GROUP INSURANCE AND RETIREMENT BENEEFrTS
---~-.~
• - - - ·- - - - ·- • # ·a_..-.,_ ,_ _ _ 19.'-M I
INVESTMENT OF PENSION FUNDS

CHAPTER 6
Table 3: Investment Guidelines for Private Sector NPS {applicable toE (Tter-
1and II), C (Tier I and II), and G (Tier • 1and II)}
Asset Class Investment Guidelines

ndex funds/ Exchange Traded Funds that replicate the portfoU
E f either BSE Sensex index or NSE Nifty 50 index. Index Fun
hemes invest in securities in the same weightage comprising o
n index. The PF will have to choose which index they intend t
rack in advance on an yearly basis.
i) Fixed Deposits of scheduled commercial banks with t

ollowing filters:
(a) Net worth of at least Rs. 500 crores and a track record
c rofitability in the last three years
b) Capital adequacy ratio of not less than 9% in the last thr

ears. Net NPA of under 5% as a percentage of net advances i
he last year.
c) list to be reviewed half yearly year
ii) Credit rated debt securities with residual maturity of not l

n three years from the date of investment, issued by Bod'
orporate including scheduled commercial banks and publt
inancial institutions [as defined in Section 4A of the Compani
t] 1956, provided that the instrument has an investment gra
ating from at least one rating agency. PFM has to do his own d
iligence too
iii) Credit Rated Public Financfallnstitutions/PSU Bonds
iv) Rated asset backed securities / Credit Rated Municipa

II'VliVls/lnfrastructure Bonds/Rated Infrastructure Debt Funds wit
he conditions given in (ii) (a).
G i) Government of India Bonds
(ii) State Government Bonds
INVESTMENT Of PENSION FUNDS
v
CHAPTER 6 - - -- - - ----
Followint restrictions/filters are betnt imposed for both Government ft

Private Sector NPS schemes to reduce concentration risks in the NPS
investment of the subscribers:
a) NPS investments have been restricted to 5% of the 'paid up equity
capital' of all the sponsor group companies or
b) 5% of the total AUM under Equity exposure whichever is lower, in each

respective scheme and 10% in the paid up equity capital of all the non-
sponsor group companies or 10% of the total AUM under Equity exposure
whichever is lower, in each respective scheme.
Investments guidelines applicable to NPS Scheme are published by PFRDA vide

its Circular reference PFRDA/15/16/PFM/7 dated 3'd June 2015. The excerpts of
the same are reproduced for ready reference.
These guidelines are applicable to Government Sector, Corporate CG and NPS '
Lite schemes of NPS and are effective from 10th June 2015:
Percentate
amount to
Cateaory be
No Cateaory/Sub Category invested
(i) Government Securities and Related investments up to 50%
(a) Government securities,
(b) Other securities (as defined in Section 2 (h) of the

Securities Contract (Regulations) Act, 1956) the
principal whereof and interest whereon is fully and
unconditionally guaranteed by the Central
Government or any State Government.
The portfolio invested under this sub-category of

securities shall not be in excess of 10% of the total
portfolio of G Sec in the concerned NPS scheme of the
pension fund at any point of time.
(c) units of mutual funds set up as dedicated funds for

investment in Government securities and regulated by
the Securities and Exchange Board of India:
Provided that the portfolio invested in such mutual

funds shall not be more than 5% of the G Sec in the
con~erned NPS Sc~eme of the pension fund any point
of t1me and fresh mvestments made in them shall not
exceed 5% of the accretions in the year
198
l< ·ll GROUP INSUAANCE AHD RETIR£M£NT 1ENE£FITS
(ii) Debt instruments and Related Investments up to 45%
(a) Usted (or proposed to be listed in case of fresh
issue) debt securities issued by bodies corporate,
including banks and public financial institutions
('Public Financial Institutes') as defined under Section
2 of the Companies Act, 2013), which have a minimum
residual maturity period of three years from the date
of investment.
(b) Basel Ill Tier-1 bonds issued by scheduled

commercial banks under RBI Guidelines.
Provided that in case of initial offering of the bonds
the investment shall be made only in such Tier-1
bonds which are proposed to be listed.
Provided further that investment shall be made in

such bonds of a scheduled commercial bank from the
secondary market or from subsequent placement only
if the existing Tier-1bonds are listed •
Total portfolio invested in this sub-category, at any

time, shall not be more than 2% of the total portfolio
of the fund .
No investment in this sub-category in initial offerings

shall exceed 20% of the initial offering and further, at (
any point of time the aggregate value of Tier I bonds
of any particular band held by the fund shall not
•
,
exceed 20% of such bonds issued till that point in time
by that Bank.
(c) Rupee Bonds having an outstanding maturity of at

least 3 years issued by institutions of the International
'•
Bank for Reconstruction and Development,
International Finance Corporation and the Asian
Development Bank,
(d) Term Deposit Receipts of not less than one year

duration issued by scheduled commercial banks,
which satisfy the following conditions on the basis of
the published annual report(s) for the most recent
years, as required to have been published by then
under the law:
i. Havins declared profit in immediately three

preceding financial years;
ii . maintainin_i a minimum Capital to Risk We!i_hted I
IC·Il GltOUP INSURANCE AND lt£T1REMENT lEN££ FITS 199
j
..:.
- ·..:.
" .;;...
"' _; ' -:.... ____ -
" ..;.
" .. -
Assets Ratio of 9% or as mandated by prevailing RBI
norms, whichever is higher;
iii. Have net non-performing assets of not more than
4% of the net advances;
iv. Have minimum net worth of not less than Rs. 200
crore.
(e) Units of Debt mutual Funds regulated by Securities

(f) The following infrastructure related debt

instruments:
(i) listed (or proposed to be listed in case of fresh

issue) debt securities issued by body corporate
engaged mainly in the business of development or
operation of infrastructure or construction/ finance of
low coast housing.
Further this category shall also include securities
issued by Indian Railways or any of the body corporate
in which it has majority shareholding.
This category shall also include securities issued by
any Authority of the Government which is not a body
corporate and has been formed mainly wtth the
purpose of promoting development of infrastructure.
It is further clarified that any structural obligation
undertaken or letter of comfort issued by the Central
Government, India Railways or any Authority of
Government, for any security issued by a body
corporate engaged in the business of infrastructure,
which notwithstanding the terms in letter of comfort
of the obligation undertaken, fails to enable its
inclusion as security converged under category (i) (b)
above,
Shall be treated as an eligible security under this sub-
category.
(ii) Infrastructure and affordable housing Bonds issued

by any scheduled commercial bank, which meets the
conditions specified in category (ii) (d) above
(tii) listed (or proposed to be listed in case of fresh

issue) securities or units issued by Infrastructure debt
funds operating as a Non- Banking Financial Company
regulated by Reserve Bank of India.
200 1<>83 GROUP INSURANCf AND RETlMMfNT KNfffiTS
(iv) Listed (or Proposed to be listed in case of fresh

issue) units issued by infrastructure Debt Funds
operating as a Mutual Fund regulated by Securities
It is clarified that, barring exceptions mentioned

above, for the purpose of this sub-category (f), a
s.ector shall be treated as part of infrastructure as per
Government of India's harmonized master-list of
infrastructure sub-sectors.
Provided that the investment under sub-categories
(a), (b) and (f) (i) to (iv) of this category No. (ii) Shall
be made only in such securities which have minimum
M rating or equivalent in the applicable rating scale
from at least two credit rating agencies registered
with Securities and Exchange Board of India (Credit
that in case of sub category (f) (iii) the rating shall
relate to the Non-Banking Financial company and for
the sub category (f) (iv) the rating shall relate to the
investment in eligible securities rated above
investment grade of the scheme of the fund.
Provided further that if the securities/entities have

been rated more than two rating agencies the two
towest of all the ratings shall be considered.

requiring a minimum AA rating. As specified above,
shall be permissible in securities having investment
grade rating below AA in case the risk of default for
such securities is fully covered with Credit Default
Swaps (CDSs) issued under Guidelines of the Reserve
Bank of India and purchased along with the underlying
securities. Purchase amount of such swaps shall be
considered to be investment made under this
category.
For sub-category (c), a single rating of AA or above by

a domestic or international rating agency will be
acceptable.
It is clarified that debt securities covered under

category (i) (b) above are excluded from this category
(ii).
_ _ INVESTM~NT OF PE!fSION F_UN[)S
0
CHAPTER 6
(iii) Short-term Debt Instruments and Related up to 5%

Investments
(a) Money market instruments

Provided that investment in commercial paper issued
by body corporate shall be made only in such
instruments which have minimum rating of A1+ by at
least two credit rating agencies registered with
Securities and Exchange Board of India.
Provided further that if commercial paper has been

rated by more than two rating agencies, the two
lowest of the ratings shall be considered.
Provided further that investment in this sub-category

in Certificates of Deposit of up to one year duration
issued by scheduled commercial Banks, will require
the bank to satisfy all conditions
Mentioned in category (ii) (d) above.
(b) Units of liquid mutual funds regulated by

Securities and Exchange Board of India. with the
condition that the average total assent under
management of AMC for the most recent six months
period of at least Rs. 5000/- Crores.
(c) Term Deposit Receipts of up to one year duration

issu5 by such scheduled commercial banks which
satisfy all conditions mentioned in category (ii) (d)
above.
(iv) Equities and Related Investments up to 15%
(a) Shares of body corporate listed on Bombay Stock

Exchange (BSE) or National Stock Exchange (NSE),
which have:
(i) Market capitalization of not less than Rs. 5000

crore as on the date of investment; and
(ii) Derivatives with the shares as underlying traded in
either of the two stock exchanges.
(b) Units of mutual funds regulated by SEBI .• which

have minimum 65% of their investment in shares of
body corporate listed on BSE or NSE.
202 IC -113 GROUP IN<.IIAUir F' um D~lltHli'NT AfNEEffTS
. ... , 1..,11'. ··· --
L HAPTER 6
(c) Exchanged Traded Funds (ETFs)/lndex Funds

regulated by Securities and Exchange Board of India
that replicate the portfolio of either BSE Sensex Index
or NSE Nifty 50 Index
(d) ETFs issued by SEBI regulated mutual funds

constructed specifically for disinvestment of
shareholding of the Government of India in body
corporate.
(e) Exchange traded derivatives regulated by

Securities and Exchange Board of India having the
underlying of any permissible listed stock or any of
the permissible indices, with the sole purpose of
hedging.
Provided that the portfolio invested in derivatives in

terms of contract value shall not be in excess of 5% of
the total portfolio invested in sub-categories (a) to (d)
above
(v) Asset Backed, Trust Structured and Miscellaneous Unto 5%
Investments
(a) Commercial mortgage based Securities or

Residential mortgage based securities.
(b) Units of securities issued by the Real Estate

Investment Trusts regulated by Securities and
Exchange Board of India,
(c) Asset Backed Securities regulated by Securities

and Exchange Board of India
(d) Units of Infrastructure Investment Trusts regulated

by Securities and Exchange Board of India.
Provided that investment under this category No. (v)

Shalt only be in listed instruments or fresh issues that
are proposed to be listed.

shalt be made only in such securities which have
minimum M or equivalent rating in the applicable
rating scale from at least two credit rating agencies
registered by Securities and Exchange Board of India
under Securities and Exchange Board of India (Credit
that in case of sub-categories (b) and (d) the ratings
IC-83 GROUP INSURANCE AND RETIREMENT BENEEFITS

203
CHAPTER 6 INVESTMENT OF PENSION FUNDS
-·---~--
shall relate to the rating of the sponsor entity floating

the trust.

been rated by more than two rating agencies, the
two lowest of the rating shall be considered.
2. Fresh accretions to the fund will be invested in the permissible categories

specified in this investment pattern in a manner consistent with the above
specified maximum permissible percentage amounts to be invested in each
such Investment category, while also complying with such other restrictions
as made applicable for various sub-categories of the permissible
investments.
3. Fresh accretions to the funds shall be the sum of un-invested funds from the
past, receipts like contributions to the funds , dividend/interest/ commission,
and maturity amounts of earlier investments etc., as reduced by obligatory
outgo during the financial year.
4. Proceeds arising out of exercise of put option, tenure or asset switch or

trade of any asset before maturity can be invested in any of the permissible
categories described above in such a manner that at any given point of time
the Percentage of assets under that category should not exceed the
maximum limit prescribed for that category and also should not exceed the
maximum limit prescribed for the sub-categories, if any. However, asset
switch because of any RBI mandated Government debt switch would not be
covered under these restrictions.
5. If for any of the instruments mentioned above the rating falls below the
minimum permissible investment grade prescribed for investment in that
instrument when it was purchased, as confirmed by one credit rating
agency, the option of exit shall be considered and exercised, as appropriate,
in a manner that is in the best interest of the subscribers.
6. On these guidelines coming into effect, the above prescribed investment

pattern shall be achieved separately for each successive financial year
through timely and appropriate planning.
7. The prudent investment of the Funds within the prescribed pattern is the
fiduciary responsibility of the Pension Funds and Trust and needs to be
exercised with appropriate due diligence. The Trust and Pension Fund would
accordingly be responsible for investment decisions taken to invest the
funds .
8. The Pension Fund and Trust will take suitable steps to control and optimtze
the cost of management of the fund.
204 IC-13 GROUP INSURANCE AND RETIREMEHT IOIEEP'ITS
INVESTMENT OF PENSION FUNDS CHAPTER6
9.
i. The trust and Pension Fund will ensure that the process of investment is
accountable and transparent.
•
:-:
ii. It will be ensured that due diligence is carried out to assess risks
associated with any particular asset before investment is made by the I
fund in that particular asset and also during the period over which it is
held by the fund . The requirement of ratings as mandated in this
notification merely intends to li mit the risk associated with investments
at a broad and general level. Accordingly, it should not be construed in
any manner as an endorsement for investment in any asset satisfying the
minimum prescribed rating or a substitute for the due diligence
prescribed for being carried out by the fund/trust.
Paid up share capital
I Definition
Paid up share capital means market value of paid up and subscribed equity
capital.
NPS investments have been restricted to 5% of the 'net-worth' of all the sponsor
group companies or 5% of the total AUM in debt securities (excluding
Government securities) whichever is lower in each respective scheme and 10%
of the net-worth of all the non-sponsor group companies or 10%of the total AUM
in debt securities (excluding Government securities) whichever is lower, in each
respective scheme.
Net Worth
I Definition
Net worth would comprise of Paid-up capital plus Free Reserves including Share
Premium but excluding Revaluation Reserves, plus Investment Fluctuation
Reserve and credit balance in Profit and Loss account, less debit balance in
Profit and Loss account, Accumulated Losses and Intangible Assets.
Investment exposure to a single Industry has been restricted to 15% under all
NPS Schemes by each Pension Fund Manager as per Level-S of NIC classification .
Investment in scheduled commercial bank FDs would be exempted from
exposure to Banking Sector.
State Government Bonds restricted to 10% of the AUM of Government Securities

of each respective scheme and to 5% to any individual state government of the
AUM of Government schemes of respective scheme.
INVESTMENT OF PENSION FUNDS
CHAPTER 6
1 t f NPS Scheme (Government pattern of investment),and Schemes E

a~~Tiie~ 1 and II), the Industry Concentration limit~ of 15% an~ Issuer
Concentration limits for Sponsor 1 Non - s~nsor group. wlll not apply m cases
where the aforesaid schemes invest in or m1rror the EqUJty Index Funds/ ITF and
I or Debt Mutual Funds.
However if tlhe PF makes investments in Equity/Debt instruments, in addition

to the in~estments in Index funds/ ETFI Debt MF, the exposure limits under such
Index funds/ ITF / Debt MF should be considered for compliance of the prescribed
the Industry Concentration, Sponsor/ Non Sponsor group norms.
I Example 1
If on account of investment in Index Funds/ ETFs/Debt MFs, if any of the
concentration limits are being breached than further investment should not be
made in the relative Industry /Company).
PFs should invest in MFs/ ETFs/ lndex Funds directly (through in- house
replication) such that the double incidence of cost is avoided (No payment to be
made to Asset Management Company).
The investment guidelines for both Government and Private sector allow
derivative instruments to be used only for the purpose of hedging and portfolio
rebalancing, i n accordance with the guidelines issued by PFRDA/SEBI/RBI.
Credit Default Swaps (CDS) with the above provisos may be treated as eligible
derivative instruments.
Pension funds have to ensure that the interest of the subscribers is safeguarded
and that they should not incur any loss while exiting the existing investments to
comply with the revised guidelines. However, all future investments should be
made strictly in compliance with the above guidelines.
The above guidelines shall take immediate effect and portfolios under all NPS
schemes are sought to be regularised as on 1st April 2014 in line with the
revised guidelines.
These instructions supersede all earlier circulars/ clarifications related to

investments issued in this regard by PFRDA , and for compliance should be
read in conjunction with Schedule-11 of the Investment Management ..\greement.
·----
INVEST~!_OF PENSION _!'"~NOS
----- -~-------
----------------~...a~
- - · - - -CHAPTER 6
3. Pension Fund Manasers
The N~ architect~tre ihs. t rahns~arent and will be web-enabled . It would allow a

· F d Ma
1
subscnber to mom or 1s er mvestments and returns under NPS th h ·
d h . , e c o1ce o
f
Pens1o~ un nager an t e mvestment option would also rest with the
subscnber.
The ~esign allo~s the s.u~scriber to switch his/her investment options as well as
pens1on funds. The fac1hty for seamless portability and switch between PFMs is
designed to enable subscribers to maintain a single pension account throughout
their saving period.
PFRDA has set up a Trust under the Indian Trusts Act, 1882 to oversee the
functions of the PFMs.
a) Fund managers for managing pension corpus of government

employees
i. LIC Pension Fund ltd.

ii. SBI Pension Funds Pvt. ltd.
iii. UTI Retirement Solutions ltd.
b) Fund managers for managing pension corpus of Private sector

employees
i. LIC Pension Fund ltd.

ii. SBI Pension Funds Pvt. ltd.
iii. UTI Retirement Solutions ltd.
iv. HDFC Pension Management Company ltd.
v. ICICI Prudential Pension Funds Management Company ltd.
vi. Kotak Mahindra Pension Fund ltd.
vii. Reliance Capital Pension Fund ltd.
viii. DSP BlackRock Pension Fund Managers Pvt ltd.
c) The NPS architecture has been managing money since Jan 2004.
Rs. 55000 crore is invested as corpus of All Sector Employees [Public and
Private]. In 2012·13, as per audited results of the Pension Funds, the
average weighted return on the corpus have been over 12.5% on the NPS
corpus.
According to the latest data released by the PFRDA on 15 May 2013, return on
investment is as low as 8.38% in case of those private sector em~oyees, who
opted for investments in Equities, the most aggressive of all categones.
•• • • ~"' • nu..• • ' VI rt.") fUN FlJNOS
The performance of the eight pension fund managers for the central
government employees indicate that the returns on subscribers' contributions
under NPS ranged between 8% and 14% during 2012-13 .The six fund categories
are:
a) Central Government
b) State Government
c) Swavalamban
d) Private-Equ1ty
e) Private-Corporate Debt
f) Private-Government Debt
-4. Investment Management Fee (IMF)
a) Based on the recommendations of the 'Expert Committee to determine

the Upper ceiling of the Investment Management Fees or other Fees (if
any) to be charged by the PFMs in the Private Sector of NPS' and with
the approval of the Competent Authority, the upper ceiling of the
Investment Management Fees has been fixed at 0 .25% p.a. of the AUM
(Asset Under Management) with effect from 1st November 2012.
b) This is applicable to all schemes for all Private and Corporate Sector
subscribers. The PFMs can fix their own Investment Management Fee for
different schemes subject to the upper ceiling of 0.25% p.a. This fee is
inclusive of brokerage except Custodian charges and applicable taxes.
c) The Investment Management Fee for the NPS Ute/ Swavalamban shall be
at par with the Investment Management Fee applicable to NPS Schemes
for Government Employees which is currently at 0.0102% p.a.
d) The Investment Management Fee applicable to the NPS schemes for

Government Employees would continue at 0.0102% p.a which was revised
with effect from 18/04/2012.
e) No differential Investment Management Fee can be quoted in a scheme

for different subscriber class
I EDmple
Professionals, Salaried and Corporates would all be quoted the same fee if they
subscribe to Scheme-E of any specific PFM.
f) Investment Management Fee is to be calculated on the Assets Under

Management (AUM) on a daily accrual basis and charged to the scheme
at the end of every quarter.
I) The PFMs will be permitted to revise the Investment Management Fee,

once in a year.
208 IC·Il GltOUP INSURAHCE AND RETI~ I[N(EFITS
. . . .- M. .aL•-----------------------, ----------------~~~--·
-
The Insurance Regulatory and Development Authority have guidelines for Insurer
who is managing various Retirement Benefits parked under Insured Scheme.
Apart from the above the Guidelines issued by CBDT and other regulatory
authorities who are the stake holders play pivotal role in shaping the investment
pattern of various retirement benefits.
On broader terms the retirement benefits are long term investments. There is a
social angle connected to these provisions. Hence guiding principle, in general,
is the security. This leads to majority of the funds in Government and other
secured investments.
The students are advised to update on prevalent guidelines issued, from time to
time, by these regulatory bodies.
ITest Yourself 4
_ _ _ __ means market value of paid up and subscribed equity capital.
I. Net worth
II. Paid up share capital
Ill. Gross profit
IV. Face value
CHAPTER 6
.- ··- - - - ·--- - ------
SUMMAJty
I Summary J
a) EPFO provides social security to the organised work force of the country.
This security cover allows monetary benefits in lump, sum as well as through
monthly accruals to the beneficiaries.
b) The Employees' Provident Fund Organisation (EPFO) will be allowed to

invest up to 55 per cent of its funds in debt securities issued by banks and
financial institution and other body corporates.
c) Till now EPFO's corpus is being put to investment in fixed Income

instruments which are considered safe. These instruments could be the:
i. Central Government Securities,

ii. Central Government Guaranteed Securities,
Hi. State Development loan,
iv. State Guaranteed Securities,
v. Public Sector undertaking,
vi . Public Sector Financial Institution.
d) EPFO's investment philosophy is HTM (Held till maturity).
e) At present, Crisil is providing consultancy services to the EPFO.
f) The existing four fund managers of EPFO are SBI, HSBC ANtC, Reliance
Capital Ltd and ICICI Securities Primary Dealership.
g) Pension Fund Regulatory and Development Authority was established by the

Government of India on 23rd August 2003 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.
h) The pension fund is a fund established by an employer to facilitate and

organise the investment of employees' retirement funds contributed by the
employer and employees.
t) Pensions broadly divided into two sectors:
i. Formal sector Pensions

ii. Informal sector Pensions
j) Formal sector pensions in India can be dMded into three categories; viz
those schemes that come under an Act or Statute, Government pensions and
voluntary pensions.
CHAPTER 6
k) The National Pension System reflects Government' s effort to find

sustainable solutions to the problem of providing adequate retirement
income.
l) NPS investments have been restricted to 5% of the ' paid up equity capital' of
all the sponsor group companies or 5% of the total AUM under Equity
exposure whichever is lower, in each respective scheme 10% in the paid up
equity capital of all the non-sponsor group companies or 10% of the total
AUM under Equity exposure whichever is lower, in each respective scheme.
m) NPS investments have been restricted to 5% of the 'net-worth' of all the

sponsor group companies or 5%of the total AUM in debt securities (excluding
Government securities) whichever is lower in each respective scheme and
10% of the net-worth of all the non-sponsor group companies or 10% of the
total AUM in debt securities (excluding Government securities) whichever is
lower, in each respective scheme.
n) Pension Funds have to ensure that the interest of the subscribers is

safeguarded and that they should not incur any loss while exiting the
existing investments to comply with the revised guidelines.
o) The NPS architecture is transparent and will be web-enabled. It would allow

a subscriber to monitor his/ her investments and returns under NPS, the
choice of Pension Fund Manager and the investment option would also rest
with the subscriber.
p) PFRDA has set up a Trust under the Indian Trusts Act, 1882 to oversee the
functions of the PFMs.
q) Fund managers for managing pension corpus of government employees are
i. LIC Pension Fund Ltd

ii. SBI Pension Funds Pvt. Ltd
iii. UTI Retirement Solutions Ltd
r) Fund managers for managing pension corpus of Private sector employees are
i. LIC Pension Fund Ltd

ii. SBI Pension Funds Pvt. Ltd
iii. UTI Retirement Solutions Ltd
iv. HDFC Pension Management Company Ltd
v. ICICI Prudential Pension Funds Management Company Ltd
vi. Kotak Mahindra Pension Fund Ltd
vii . R~liance Capital Pension Fund Ltd
viii. DSP BlackRock Pension Fund Managers Pvt Ltd
CHAPTER 6 SUMMA
s) The six fund categories are:
i. Central Government
ii. State Government
iii. Swavalamban
iv. Private-Equity
v. Private-Corporate Debt
vi. Private-Government Debt
CHAPTER 7
RETIREMENT SCHEMES
[ Chapter Introduction
Occupational pension schemes (also known as "company" and "employers"
schemes) can only be set up by employers (companies, partnerships or sote
traders) for the provision of:
i. Pension and lump sum benefits for their employees at retirement and;
ii. Widows I widowers and dependants' benefits in the event of death before
retirement, or death in retirement.
The two broad categories of occupational pension schemes are defined benefit
and defined contribution schemes.
The appeal of pension schemes lies mainly in their tax-efficiency. In order to be

able to deliver all its tax benefits, an occupational scheme must receive
"exempt approval" from the Pension Schemes Office [PSO], a division of the
Inland Revenue. Exempt approval requires, among other things, that the scheme
be set up under trust to segregate scheme and employer's assets, and that a UK-
resident scheme administrator be appointed.
Occupational schemes can be set up under Trust (with trustees to look after the
Trust) or under contract. In UK, defined benefit schemes and many defined
contribution schemes are set up under Trust. No trustees exist, when schemes
are set up under contract and in the UK such schemes are usually stakeholder or
group personal pension schemes on a defined contribution basis.
Exempt approval ensures that:
i. Employers' contributions are not treated as "benefits in kind" in the hands of

the members and do not create income tax or national insurance liabilities
for employees
ii. Employers' contributions are a deductible expense for income or corporation
tax purposes and create no national insurance liabilities for the company
iii. Members' personal contributions attract personal tax relief.
1v. The pension fund accumulates free of income and capital gains taxes,
except for share dividends where advance corporation tax is not
reclaimable.
This chapter discusses the Occupational Retirement Benefit Scheme in UK.
[ A. Types of Retirement Schemes
I A. Types of Retirement Schemes ]
1. The Trust Deed and Rules and Scheme Administration
Under Trust-based occupational pension scheme, the sponsoring employer Wilt

set:
i. The terms of the trust,

ii. The benefit levels,
iii. Requirement for member's contributions and
iv. Eligibility criteria for membership
These will be set out in the Trust Deed and Rules.
The sponsoring employer and the trustees who oversee the scheme must comply
with its obligations under the Trust Deed and Rules.
The sponsoring employers are also involved in the day-to-day administration of

the scheme. Although the trustees have the responsibility of administering but
it is common for them to delegate the day-to-day duties.
The sponsoring employer is likely to be responsible for:
i. Ensuring payment of employer and employee contributions

ii. Providing up-to-date data
iii. Notifying the scheme of changes to membership, e.g. new employees,
employees leaving the scheme, employees retiring.
2. Defined Benefit Schemes
a) Concept
Defined benefit occupational pension schemes generate guaranteed benefits

based typically on final pensionable salary and years of service since joining
the scheme. If the underlying investments of a defined benefit scheme
under-perform, then the employer may have to pay more money into the
scheme to honour the guarantees.
b) Cost
The cost of defined benefit schemes depends upon
i. The level of future investment returns,

ii. How long the pensioners live in retirement and
iii. The cost of administration
Therefore, the cost of benefit scheme is not known until all the benefits
have been paid.
218 IC-83 GROUP INSURANCE AND RETIREMENT BENEEFITS
TYPES Of Rf!IREMENT_S~HEMES _ CHAPTER 7
...----·-
c) Rate of beneftt accrual
The rate of benefit accrual is such that benefits fall within maximum
emerging benefits.
I Example
For example, a typical accrual rate is 1/ 60th of final pensionable salary for each
year of service to a maximum of 40 years. The maximum pension is therefore
40/ 60 times final salary (i.e. 213).
d) Commutation
The scheme rules commonly allow part of the pension to be commuted for a
tax-free lump sum at a rate of 3/ 80th times final salary for each year of
service, leaving a reduced pension of 1 / 80th times final salary for each year
of service.
A so-called ..80ths" scheme is therefore equivalent to a "60ths" scheme after
exercising commutation .
The defined benefit scheme is a valuable perk especially in volatile financial

markets and with annuity rates in long-term decline because of rising life
expectancy. On the other hand, they impose an open-ended funding
commitment upon employers.
Members of defined benefit schemes should be wary of inducements to

switch into defined contribution arrangements. Advice should always be
sought as members will be surrendering the right to guaranteed benefits,
and the new terms may be insufficient to compensate for this loss.
3. Deftned Contribution Schemes
a) Concept
Defined contribution occupational pension schemes generate non-

guaranteed benefits based on the fund value at retirement, subject to
maximum emerging benefits.
b) Annuity
The size of the tax-free lump sum is calculated according to the applicable
maximum emerging benefits regime. The balance of the fund is used to buy
an annuity on the open market.
c) Consequences of under-performance
If the underlying pension fund investments under-perform, the employer is

under no obligation to increase the rate of funding. The consequences of
under-performance fall upon members and not employers.
4. Hybrid Schemes
a) Concept
A hybrid scheme offers both defined benefit and defined contribution

sections or benefits that are the greater of two amounts.
I Example
For example:
i. A main benefit that is defined contribution in nature, with a promise the

benefit will. be at least a defined benefit amount
ii. A main benefit that is defined benefit in nature, with a promise the benefit
will be at least a defined contribution amount.
These schemes usually exist as a modification of defined benefit schemes

with the condition that the value of the benefit will be no less than the
value of accumulated member contributions. As the employer usually pays
the major part of the contributions, such condition does not usually affect
and when it does it will usually only be for the youngest members on
withdrawing soon after joining. This is because in a defined benefit scheme
the present value of a young member's future pension benefits will be quite
low as
i. The member has very little past service
ii. The member is a long way from retirement and so there is a heavy
element of discounting
iii. On leaving the scheme, the benefits are based on salary at date of
leaving, with (perhaps) statutory revaluation (normally at a low rate) to
retirement.
As a result the accumulated value of the member's contributions may well

be greater than the defined benefit.
J£
-- -----
TYPES Of ~~ENT _S<:~EMES .. _ -- ----. CHAPTER 7
In defined contribution schemes, the above condition of defined benefit is

sometimes applied to protect the members against some of the risks of low
investment returns. The level of the condition is often at a level that would
only apply in the event of exceptionally poor investment conditions.
A more generous condition may be applied after a conversion of a scheme

from a defined benefit form to a defined contribution form. These
conditions are usually only applied on a temporary basis, and are useful to
help an employer ease through a change in the nature of the scheme.
5. Maximum Emerging Benefits
a) Concept
One of the defining characteristics of occupational pensions is that they are

"tested" on their emerging benefits rather than on contribution levels. The
Inland Revenue imposes limits on the size of the pension, the tax-free lump
sum and death benefits, known as maximum emerging benefits.
The Inland Revenue allows benefits to be drawn from age 50 to 75, except
for members of certain occupational groups and for those retiring on
grounds of ill health, who may draw benefits before 50.
The largest pension that can be funded is two thirds of "final remuneration"
subject to years of service and an RPI -adjusted earnings cap where
applicable. However, the pension may escalate in retirement.
The member may commute some of this pension for a tax-free lump sum.
The maximum is 150 per cent of final remuneration subject to years of
service and the earnings cap where applicable.
The member cannot have both: two thirds of final remuneration pension and
a tax-free lump sum. The lump sum is taken at the cost of a reduced
pension.
The scheme may provide a death-in-service lump sum of four times final
remuneration at date of death (capped where applicable), plus a spouses'
and dependents' pension of up to two thirds of the member's prospective
pension plus return of member's contributions with interest. Death-in-
service benefits are exempt from inheritance tax.
The scheme may provide a death-in-retirement pension of two thirds of the

deceased member's pension , payable to a spouse and dependent relatives.
There is normally no inheritance tax on non-spouse dependents' pensions
~e they are paid to children in full time education or for the care and
matntenance of dependent relatives.
CHAPTER 7 TYPES Of_R!"fiR~HT SCHEMES
The Inland Revenue's definition of final remuneration relates to total

emoluments which include basic salary and fluctuating emoluments
averaged over three consecutive years. Fluctuating emoluments are all
payments that are not on a fixed basis such as overtime, commission,
bonuses, profit-related pay and benefits in kind [P11 Ds] like the taxable
value of a company car.
Furthermore, the calculation of final salary can be based on emoluments

earned in years prior to retirement and inflated by the retail price index to
the year of retirement. This is known as dynamtstna.
The Inland Revenue allows all years of service with an employer to be

aggregated for the purpose of computing maximum emerging benefits. This
means that periods of service prior to joining the company scheme may
count as pensionable service.
It is importa.n t to appreciate the difference between maximum emerging

benefits and scheme benefits. Maximum emerging benefits represent the
highest level of benefits allowed by the Inland Revenue. Scheme benefits
are those that are actually payable under the rules of the scheme in
question, and are frequently lower.
b) Funding for maximum emerging benefits
The fact that occupational pensions are tested on emerging benefits rather
than contributions makes accurate planning for maximum emerging benefits
virtually impossible.
c) Contributing for maximum emeratna beneflts 4!ntatls:
i. Projecting remuneration (including fluctuating emoluments) ahead to

retirement.
ti. Making assumptions about investment yields, future annuity rates and
inflation
iii. Calculating final remuneration by Inland Revenue procedures and the

fund needed to generate maximum benefits by applying the assumed
annuity rate.
tv. Calculating the regular contribution level needed to build the fund by
applying the assumed investment yield
The Inland Revenue lays down permissible assumptions for salary growth,
earnings cap growth and the investment yield.
·· - · --~· ·
TYPES Of RETIREMENT SCHEMES

CHAPTER 7
6. contributions
a) Employer's Contributions
An employer's co~tribution of at least 10 per cent of total contributions is a

mandatory requ1rement of an exempt approved occupational pension
scheme, except where the scheme is over-funded.
Because occupational schemes are tested on their emerging benefits, there

is technically no upper limit on employers' contributions. The maximum
employer's contribution is that which is estimated to generate maximum
emerging benefits.
The Inland Revenue requires that funding be conducted on a regular basis

and that any contribution rate be sustained for at least three consecutive
years. Where a large irregular contribution is paid in, for example in
consideration of past service, the revenue may take the view that this is a
tax-avoidance exercise and has the right to spread corporation tax relief
over up to four years.
Where the pension scheme becomes overfunded, which is to say that it has
more money than is required to meet its liabilities or maximum emerging
benefits, then contributions may have to be reduced, unless the trustees
decide to enhance benefits for existing and I or prospective pensioners. Any
surplus taken back into the employer company is taxed at 40 per cent.
b) Member's Contributions
A member's personal contribution is not a mandatory requirement of an

exempt approved occupational pension scheme. A scheme that does not
require a member's personal contribution is known as "non-contributory". In
practice, however, a personal contribution to the main scheme is usually a
condition of membership.
Members' personal contributions are restricted to 15 per ce~t of

"pensionable remuneration" as defined by the scheme rules up to max1mum
emerging benefits.
CHAPT£R 7 TYPES Of RETIREMENT SCHEMES
7. Toppillj-up benefits
There are several ways in which benefits may be raised, assuming that the
member is not on target for maximum emerging benefits.
a) Ausmentation of main scheme benefits
Some defined benefit schemes may have accumulated surpluses, which can
be used to improve the level of benefits to current pensioners and to
prospective pensioners (i.e. employees) who are still accruing benefits.
Defined contribution schemes, which are limited only by maximum emerging

benefits, usually consist of a number of individual executive pension plans
under the scheme umbrella. At retirement, the member can attempt to
reduce any surplus by purchasing a guaranteed and I or escalating (joint
life) annuity and a full death-in-retirement pension for widow I widower
and dependent relatives. However, where the surplus cannot be used up,
the remainder is returned to the employer company and is potentially
taxable at 40 per cent.
b) Top hat schemes
Members of defined benefit schemes with narrowly defined final

remuneration and qualifying pensionable service can top up towards
maximum emerging benefits through additional money-purchase executive
pension plans.
A top hat scheme has to be set up by the employer and approved by the
PSO. An employer's contribution is required. Top hat schemes are therefore
more prevalent among directors and senior executives than rank and file
employees.
c) Salary, bonus and dividend sacrifice
Where the employer is unwilling to contribute to the main company scheme

or to a top hat arrangement, the member can:
i. Make a salary sacrifice. The member effectively agrees to a reduction in

salary and the employer contributes the equivalent amount to an
executive pension plan. This approach does not work where the main
scheme is a defined benefit arrangement, because the salary sacrifice
reduces the member's pension and lump sum entitlement.
ii. Elect in advance to take a bonus sacrifice in exchange for an employer's

contribution to a top hat scheme.

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- - SUMN.

f) Present value of obligation (PVO) PVO is present value of benefits payable

k) Expected Return on Plan Assets is the net return. It comprises of interest,

l) When there is substantial decrease in the number of employees as in the

m) A settlement occurs when a plan is permanently settled, s.ay, by paying lump

n) The objective Indian Accounting Standard (lnd AS) 19 Standard is to

i. A liability when an employee has provided service in exchange for

o) Under defined benefit plans:

i. The entity's obligation is to provide the agreed benefits to current and

p) Accounting for defined benefit plans is complex because actuarial

r) Other Long-term Employee Benefits include employee benefits other than

s) Termination Benefits are Employee benefits provided in exchange for the

L An entity's decision to terminate an employee's employment before the

ii. An employee's decision to accept an offer of benefits in exchange for

a) Government (Both Central and State),

The Board administers a contributory provident fund, pension scheme and an

The Board operates three schemes:

a) The Employees' Provident Funds Scheme 1952 (EPF)

The Provident Fund may be either privately managed or Government Managed

New Investment Pattern for Non-Government Provident Funds,

The revised investment pattern explicitly recognises the fiduciary responsibility

i. providing minimum and maximum limits for Central Government Securities,

ii. Providing a mm1mum investment ceiling for the categories of (a)

v. Prescribing investment of minimum 5% and up to 15% of the investible funds

vi. Strengthening credit rating requirements for some financial instruments

Further, it has been provided that,-

Every employer in relation to an establishment exempted under clause (a) or

(b) Other securities (as defined in Section 2 (h) of

(c) units of mutual funds set up as dedicated funds

Provided that the portfolio invested in such mutual

(b) Basel Ill Tier-1 bonds issued by scheduled

Provided further that investment shall be made in

(c) Rupee Bonds having an outstanding maturity of at

(d) Term Deposit Receipts of not less than one year

i. Have declared profit in immediately three

ii. Have maintained a minimum Capital to Risk

iit Have net non-performing assets of not more than

iv. Have minimum net worth of not less than Rs.200

(e) Units of Debt mutual Funds regulated by

Provided that fresh investment in Debt mutuail Funds

178 IC-83 GltOUP INSUft.UIC.E A.NO RETl~T 8ENEEFITS

(f) The following infrastructure related debt

(i) Listed (or proposed to be listed in case of fresh

(iii) Listed (or proposed to be listed in case of fresh

(iv) Listed (or Proposed to be listed in case of fresh

IC-83 GROUP INSURANCE AND RETIREMENT BENEEFITS 179

Provided that the investment under sub-cat~

Provided further that if the securities/ entities have

Provided further that investment under this cat~egory

(a) l#oney maritet instruments

Provided that investment in commercial paper issued

Provided further that if commercial paper has been

Provided further that investment in this sub-category

(b) Units of liquid mutual funds regulated by

(c) Term Deposit Receipts of up to one year duration

(i) Market capitalization of not less than Rs. 5000

(ii) Derivatives with the shares as underlying traded

(b) Units of mutual funds regulated by SEBI, which

Provided that the aggregate portfolio invested in

(c) Exchanged Traded Funds (ETFs)/lndex Funds

(d) ETFs issued by SEBI regulated mutual funds

(e) Exchange traded derivatives regulated by

Provided that the portfolio invested in derivatives in