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Subject BUSINESS ECONOMICS

Paper No and Title 9, FINANCIAL MARKETS AND INSTITUTIONS

Module No and Title 29, PENSION FUNDS

Module Tag BSE_P9_M29

BUSINESS PAPER No. : 9, FINANCIAL MARKETS AND INSTITUTIONS

ECONOMICS MODULE No. : 29, PENSION FUNDS
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TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Pension Funds
4. Pension Plans
4.1 Defined Benefit Pension Plan (DBPP)
4.2 Defined Contribution Pension Plan (DCPP)
4.3 Pay As You Go Pension Plan
5. Management of Pension Funds
6. Reasons for Growing Importance of Pension Funds in India
6.1 Nuclear families
6.2 Longevity
6.3 Reduced Dependency on others
6.4 Increase in elderly population
7. Pension System in India
8. Pension Reforms in India
9. Pension Fund Regulatory and Development Authority (PFRDA)
10. Current Pension Schemes in India
10.1 Employees’ Pension Scheme (EPS)
10.2 Bank Employees Pension Scheme
10.3 Insurance Employee Pension Scheme
10.4 Privately Administered Superannuation Fund
10.5 LIC Pension plans
11. National Pension Scheme (NPS)
12. NPS-Lite
13. Atal Pension Yojna (APY)
14. Summary

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1. Learning Outcomes
After going through this module you will be able to learn about the:

 Pension funds and pension plans and management of pension plans.

 Pension system in India and reasons for growing importance of pension funds in India.
 You will also learn about pension reforms in India, about PFRDA.
 Learn about current pension schemes in India including NPS, NPS-Lite and APY.

2. Introduction
In India, most of the people are self-employed or work in unorganized sector. These people don’t
have any kind of financial security in their old age. Access to pension is available to people who
works in organized sector. Population dynamics is changing. Old-age income security is major
social economic concern for the government. Hence pension reforms are a major issue for policy
makers. Pension funds act as a financial intermediary. And at the same time it provides income
security to the elderly people of the society.

3. Pension Funds (PF)

A pension plan is an accumulation of funds over working years of an individual which is paid
back to him in his non-working years after his retirement. Pension funds are now growing at a
very fast pace and acting as a powerful financial intermediary. Pension Fund is an intermediary
who receives contributions, accumulates them and makes payment to the subscriber in the manner
as specified by the Authority. Pension Fund has to register itself with the Authority and obtain
Certificate of Registration from the Authority (PFRDA).

Functions of Pension Fund: Functions of pension fund are decided by the terms of its
Certificate of Registration. Pension fund has to follow all the regulations issued by Authority
from time to time.

4. Pension Plans
Pension plan is a method to provide regular monthly income to the participating individual when
he retires. Pension plan are sponsored by employers or labour unions. Employer can be
central/state government or private employers. Pension plans can be of following types:

4.1 Defined Benefit Pension Plan (DBPP)

Under defined benefit pension plan an employer or plan sponsor promises a specified monthly
benefit on retirement. This monthly benefit is predetermined with the help of formula. This
formula is based on employee’s past earnings, total years served and on his age. In India,
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ECONOMICS MODULE No. : 29, PENSION FUNDS
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government as an employer and public sector enterprises mostly provide this type of pension
plan.

4.2 Defined Contribution Pension Plan (DCPP)

As the name suggest under defined contribution pension plan the contribution made by both
employer and employee is predefined. Both employer and employee make contributions on
regular basis. The benefit to be received after retirement totally depends upon the earnings of the
funds. Defined contribution pension plan are also known as Money Purchase Pension Plan.

4.3 Pay As You Go Pension Plan

In this type of pension plan beneficiary decides his contribution. This contribution can be
deducted monthly from his/her salary or can be contributed in lump sum. The employees can
choose from various investment options.

5. Management of Pension Funds

Most of the sponsors appoint trustee to manage their pension fund and very few sponsor manage
themselves their pension fund. Trust department of any insurance company or commercial bank
or mutual fund is generally appointed as trustee. Trustee has a responsibility to invest
contributions provided by the sponsors and to pay benefit to the retired person on time. Some
large sponsors can appoint more than one trustee to manage their pension fund. In case of DBPP,
sponsors use to provide investment guidelines regarding portfolio consumption, selection of
securities and target returns. If Pension funds are managed by trustees, then it has few advantages.
Firstly, the trustee has greater expertise in investing the funds. Secondly, transaction cost is very
low. Thirdly appointing a trustee increases the creditability of the pension fund. Generally,
pension funds have fixed and pre-determined flow of funds in and out every month. The amount
contributed by the sponsor (employer) and participant (employee) are pre-determined. Hence
liquidity is not a big issue for the pension fund but their main consideration is associated risk and
return on the funds invested. Pension funds mostly invest in high yielding long term assets.
Generally, DBPP invest in fixed income assets and DCPP prefer to invest in high yielding
corporate equities. Both DBPP and DCPP invest considerable amount of funds in mutual funds or
insurance companies also. In few developed countries pension funds have emerged as an active
and big institutional players in securities market. Many countries have allowed private companies
to actively participate in pension fund sector. Ultimately this has resulted in the development of
financial markets.

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6. Reasons For Growing Importance of Pension Funds in India

The reasons behind the fast growth of pension funds in India are:

6.1 Nuclear families

Now a day’s nuclear families are more popular. Earlier in joint family system younger members
of the family took care of the elderly members in the family. But in nuclear family system it is
difficult for young members to take care of elderly members as they live apart from them. So this
gives rise to pension funds.

6.2 Longevity

Another reason for growing pension funds is longevity of people. People live long life after their
retirement. If a person is self-employed then he can work beyond the age of retirement, but if
person is salaried then he gets retirement at certain age. And after his retirement his non-earnings
years start. People are retiring younger and living longer life. They spend long years in their
retirement age. There must be some kind of financial arrangement to finance the old age
expenses. Pension funds are the only option in this situation.

6.3 Reduced Dependency on others

With an arrangement like pension funds an individual becomes self-dependent. This reduces his
dependency on others for his financial needs.

6.4 Increase in elderly population

India is known as a young nation with a large number of young populations. But after few
decades this whole young population will become old. At that time, they all will need pension to
finance their expenses. So pension funds are good option for young citizens to save for retirement
period.

7. Pension System in India

Till 1999, in India there was very small coverage of pension. Only organized sector employees
were covered under pension system. Employees provident Fund (EPS), Employees Pension
scheme (EPS) and Public Provident Fund (PPF) were the only few schemes available to the
employees. People having government as their employer were only beneficiary of the pension and
this pension was generally defined benefit pension plan. People working in private sector were
covered by employee provident fund and this was mandatory for them. Indian pension system has
seen many policy changes during the year 2000 to 2009. First OASIS project was launched and
then interim PFRDA was setup. National Pension Scheme (NPS) was launched.
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Current pension schemes operating in India can be broadly classified as:

1. Civil Service Pension Scheme

2. Employee Provident Fund (EPF)
3. Employee Pension Scheme (EPS)
4. National Pension Scheme (NPS)
5. Voluntary Pension Scheme: There are two types of scheme under this- (a) Personal/ Group
pension Plan and (b) Public Provident Fund

8. Pension Reforms in India

1. By increasing retirement age from 60 to 62 years pension payments are deferred.
2. Defined Benefit Pension System replaced with Defined Contribution Pension System.
3. Setting up of Pension Fund Regulatory & Development Authority (PFRDA).
4. Introduction of NPS and extending the scheme to state governments, autonomous body
and unorganized sector.
5. Introduction of NPS-Lite for economically weaker section of society.
6. Maximum entry age is increased to 60 years under the NPS, as this will enable more and
more people to join the scheme.

9. Pension Fund Regulatory And Development Authority (PFRDA)

In 1999, Government of India lunched a nationwide project named “OASIS” (Old Age Social
&Income Security). After the recommendations of OASIS report, government of India replaced
the Defined Benefit Pension System with new Defined Contribution Pension System. This new
Defined Contribution pension system was for all the new recruits in central and state government
service, except to Armed Forces. In order to develop, promote, and regulate pension sector in
India, on 23rd August 2003, government of India established Interim Pension Fund Regulatory &
Development Authority (PFRDA) through a resolution. On 22nd December 2003, government
notified the contributory pension system, now it was named as National Pension Scheme (NPS).
NPS came in effect from 1st January 2004, for all the new recruits to central and state government
service, except Armed Forces. Subsequently from 1st May 2009, NPS was extended to all citizens
of the country including unorganized sector and self-employed professionals but on a voluntary
basis. On 19th September 2013, The Pension Fund Regulatory & Development Authority Act was
passed. PFRDA regulates NPS, and confirms the orderly growth and development of pension
market.

Preamble
Basic functions of PFRDA are described by the preamble of the Pension Fund Regulatory &
Development Authority Act, 2013. Preamble is as follows-

“…. 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.”

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Composition of the PFRDA

The composition of Authority is as follows: A Chairperson and not more than five members, of
whom at least three shall be Whole-time Members, to be appointed by Central government.

10. Current Pension Schemes in India

In India following pension schemes are available:

10.1 Employees’ Pension Scheme (EPS)

Employees’ Pension scheme was made mandatory in 1995. This pension scheme is operated by
Employees’ Provident Fund Organization. This pension scheme is applicable to all the
employees’ of all those factories and establishments where Employee’s Provident Funds and
Miscellaneous Provisions Act 1952 applies. The benefits under EPS are (1) superannuation
pension (2) retirement pension (3) disability pension (4) survivor pension (5) widow pension (6)
orphan pension. Employer has to transfer 8.33 percent of employee’s salary to Employees’
pension fund. Central government also contributes 1.16 percent of employees’ salary to this fund.
Minimum pension of Rs 500 per month is provided under the scheme. Amount of pension is
based on average salary of past 12 months from the date of exit and total years of employment. A
person has to give the name of his spouse and all children’s in prescribed form. If a person is not
having family, then he can nominate any other person. Funds received under the scheme are
generally invested in government securities and government deposits.

10.2 Bank Employees Pension Scheme

Public sector bank employees are covered under this pension scheme. This scheme was started by
the Bank Employees’ Pension regulations 1995. Bank has to constitute Pension Fund under a
trust which is irrevocable trust. Bank contributes to the fund equal to the 10 percent of salary of
the employee and accumulated contributions of the bank to the Provident Fund and interest
accrued thereon till the date of such transfer. An employee with a minimum of ten years of
service on the date of retirement will be eligible for pension. Employee can nominate any family
member as beneficiary after his death.

10.3 Insurance Employee Pension Scheme

This Pension is covered under General Insurance (Employees’) Pension Scheme 1995. All the
employees of General insurance are covered under this scheme. Corporation or Company shall
contribute 10 percent per month of salary of the employee in the pension fund. An employee with
a minimum of ten years of service on the date of retirement will be eligible for pension.
Employee covered under this pension can nominate any family member as beneficiary after his
death.

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10.4 Privately Administered Superannuation Fund

Employers can create privately managed superannuation fund. All the accumulated funds must be
transferred to irrevocable trust fund and when the employee retires then suitable annuity plan has
to be taken up from LIC. Otherwise company can purchase any superannuation plan with LIC and
pay contributions for the employee.

10.5 LIC Pension plans

In the recent past LIC has launched few pension plans. These plan are LIC New Jeevan Nidhi,
Jeevan Akshay VI, New Jeevan Suraksha I, and Varishtha Pension Bima Yojna etc.

11. National Pension Scheme (NPS)

On 1st May 2009 Government of India launched NPS for all citizens of India and Corporate sector
from December 2011.National Pension Scheme (NPS) is regulated and administered by PFRDA.
NPS is a retirement saving scheme with defined contribution. NPS is voluntary, it is designed to
create habit of saving for their retirement among individuals. NPS provides a sustainable solution
to the problem of providing pension to every citizen of India. NPS is for all the new recruits to
central and state government service, except Armed Forces.

The person who joins the NPS Scheme is known as “subscriber”. In order to join NPS every
subscriber has to open an account with Central Recordkeeping Agency (CRA). This account will
have a unique Permanent Retirement Account Number (PRAN) as an identity. Under NPS
scheme a pension fund is created through pooling the individual savings. These funds are
invested by professional fund managers. These fund managers are regulated by PFRDA and they
invest funds as per approved investment guidelines. Usually these fund managers invest funds in
government bonds, corporate debentures, mutual funds, bill and shares. These funds grow and
accumulate as per the returns gained on the investment made. Two types of accounts are available
to subscribers under NPS i.e. Tier I and Tier II.

1. Tier I Account: Tier I account is a non-withdrawable account in which subscribers

contribute their savings (may include employer contribution also).
2. Tier II Account: This is a voluntary savings account. Subscriber can withdraw their
savings anytime whenever they wish. One must have active Tier I account for opening of
Tier II account.

Institutional Framework of NPS:

PFRDA has appointed National Securities Depository Limited (NSDL) as the Central
Recordkeeping and Accounting agency (CRA). PFRDA has appointed a custodian, three
pension fund managers and a trustee bank for NPS. All the contributions received under NPS
are transferred to NSDL. Subscriber’s contributions are invested as per investment guidelines.

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Exit from NPS

On 11th May 2015, PFRDA has issued Exits and Withdrawals under NPS Regulations, 2015. In
accordance with these regulations, subscriber can exit from NPS. CRA has been assigned the duty
of receiving instructions related to all types of withdrawals, processing and settlements of all
claims from NPS scheme. CRA has created a NPS Claim processing cell (NPSCPC) for
processing all the claims application under NPS.

12. NPS -Lite

NPS-Lite is an alternative model of NPS to provide financial security to economically weak
people coming from low income strata and having lower educational background. On 1st April
2010, Government of India lunched NPS-Lite. NPS-Lite is having low cost structure.
Government Co-sponsored Schemes (GCS), self-help groups (Aggregators) and government
welfare and affinity groups are covered under NPS-Lite scheme. NPS-Lite can be joined through
Aggregator and subscriber can be in the age group of 18 to 60 years.

13. Atal Pension Yojna (APY)

In the budget year 2015-16 Government of India announced and started a universal social security
scheme named as Atal Pension Yojna, for the poor and under-privileged people. This pension
scheme was launched in June 2015. This scheme is open to all bank account holders. Minimum
age of joining APY is 18 years and maximum age is 40 years. Subscriber can exit from the
scheme at the age of 60 years and pension will also start at the age of 60 years. Central
government will co-contribute 50 percent of the total contribution made by the subscriber or
Rs.1000 per annum, whichever is lower. Depending upon the contribution made by the
subscriber, at the age of 60 years, subscriber will get guaranteed minimum pension of Rs. 1,000/-
or 2,000/- 3,000/- or 4,000/- or 5,000/-per month. In order to open APY account individual must
have savings bank account. One should approach the bank branch and fill up the APY registration
form, provide mobile number and aadhaar number. One has to keep the required balance in the
saving bank account. One has to provide nomination details in APY account. Spouse will be the
default nominee in case subscriber is married and if the subscriber is unmarried they can
nominate any other person as nominee. After attaining the age of 60 years, subscriber has to
submit the request to the concern bank for drawing the guaranteed minimum monthly pension.
One cannot exit from the APY before 60 years, generally exit is not permitted. PFRDA can
permit exit only in exceptional cases i.e. death of the beneficiary or in case of terminal disease
etc.

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14. Summary
 A pension plan is an accumulation of funds over working years of an individual which is
paid back to him after his retirement.

 Pension Fund is an intermediary who receives contributions, accumulates them and makes
payment to the subscriber in the manner as specified by the Authority.

 Pension plan are sponsored by employers. There are three types of pension plans, Defined
Benefit pension plan, defined contribution pension plan and pay as you go pension plan.

 Most of the sponsors appoint trustee to manage their pension fund. Trustee has a
responsibility to invest contributions provided by the sponsors and to pay benefit to the
retired person on time.
 Nuclear families, longevity, reduced dependency on others and increases in elderly
population are the reasons behind the fast growth of pension funds in India.

 Till 1999, in India there was very small coverage of pension. Only organized sector
employees were covered under pension system.

 On 23rd August 2003, government of India established Interim Pension Fund Regulatory &
Development Authority (PFRDA) through a resolution. PFRDA regulates NPS, and
confirms the orderly growth and development of pension market.

 India at present have following pension schemes: Employees’ Pension Scheme (EPS), Bank
Employees Pension Scheme, Insurance Employee Pension Scheme, Privately Administered
Superannuation Fund and LIC Pension plans.

 On 1st May 2009 Government of India launched NPS for all citizens of India and Corporate
sector from December 2011. NPS is voluntary and regulated by PFRDA.

 NPS-Lite is an alternative model of NPS to provide financial security to economically weak

people coming from low income strata and having lower educational background.

 Government of India announced and started a universal social security scheme named as
Atal Pension Yojna, for the poor and under-privileged people. This scheme is open to all
bank account holders.

15. References
 http://www.pfrda.org.in/index1.cshtml?lsid=4 (accessed on 18 Dec 2015)
 http://financialservices.gov.in/PensionReforms_india_index.asp (accessed on 18 Dec
2015)
 http://www.vitt.in/pension.html (accessed on 18 Dec 2015)
 https://npscra.nsdl.co.in/all-faq-about-nps.php (accessed on 18 Dec 2015)
 http://www.epfindia.com/site_en/AboutEPFO.php (accessed on 18 Dec 2015)
BUSINESS PAPER No. : 9, FINANCIAL MARKETS AND INSTITUTIONS
ECONOMICS MODULE No. : 29, PENSION FUNDS