Current Scenario of Social Security in India

Financial Management

Submitted by

Roll No. 11-20MBA (AB) 2009-11

Presentation Contents

Social Security

3 Pillars of Pension System

Scenario of Pension in India

• The main objective of any social security system is the provision of a socially adequate and equitable retirement protection system on a sustainable basis.

• The Current Regulator :Pension Fund Regulatory and Development Authority

Statistics

• India has nearly eighty million elderly people, which is one eighth of world’s elderly population.

• This segment of population is growing at a rate of 3.8% per annum as against a rate of growth of 1.8% for the overall population.

• A vast majority of this population is not covered by any formal old age income scheme and are dependent on their earnings and transfer from their children or other family members.

Scenario of Pension in India

• Pensions in India can be divided into three categories

– Government pensions– Schemes that come under an Act– Voluntary pensions

Government Pensions

• The Government amended the regulations to put in place the New Pension System.

• The old scheme continues for the existing employees (i.e. those who joined service prior to January 1, 2004).

• Central government pensions • Civil servants pensions • Defence • Railways • Posts

• State government pensions

Pensions under an Act

• Acts for pensions in India

• Pensions under the EPF&MP Act 1952

• Employees Provident Fund • Employees Pension Scheme • Employees Deposit Linked Insurance Scheme

• Two other Acts as well.

Voluntary pensions

Other Arrangements for Informal Sector

• Senior Citizens Saving Scheme • NOAPS

National Old Age Pension Scheme

• Public Provident Fund

EPF

• Establishments employing 20 or more.

• Co-operative Societies, employing 50 or more

• A stipulated amount (currently 12%) is deducted from the employee's salary and contributed towards the fund. This amount is decided by the government.

EPF

• Available to salaried employees.

• Tax-qualified

• Contribution retirement benefit plan

• Equal contribution made by the employer and the employee

• At the specified rate

• Payable in lump sum on retirement.

EPF

• 8.5% per annum (Current)

• Eligible for deduction under the Rs 1,00,000 limit of Section 80C

• No tax on maturity. (After 5 Years)

PPF

• Established by the central government

• The minimum amount to be deposited in this account is Rs 500 per year. • The maximum amount you can deposit every year is Rs 70,000.

• 8% per Annum (Current)

• Accumulated sum is repayable after 15 years.

• Eligible for deduction under the Rs 1,00,000 limit of Section 80C

• No tax on maturity.

Limitations of Existing System

• Heavy financial burden on the Government• Limited coverage• Fragmented regulatory framework• Lack of individual choice and portability• Lack of uniform standards• High incidence of administrative cost• Low real rate of returns• Unsustainable.

• Non-sustainability of the existing pension system is accentuated by the sharp increase in financial burden on the Government and the other employers on account of pension liabilities.

Statistics

Only about 12 per cent of the working population in India is covered by some form of retirement

benefit scheme.

New Pension System

• Introduced in April 2004, to cover all entrants in government service.

• After six years of its launch, only 12 States have executed the NPS scheme, eight have merely entered into an agreement with the NPS Trust.

• NPS is now available to every citizen from 1st April, 2009 on a voluntary basis.

– On May 1, 2009, the Pension Fund and Regulatory Development Authority (PFRDA) had thrown open the scheme to all citizens of India.

• Annual fund management charge of 0.0009% !!!– Extremely low when compared to a pension plan offered by an insurance company charges a

fund management charge of 0.75-1.75% of the value of the investment every year.

NPS

• National Securities Depository Limited (NSDL) has been appointed as the CRA.

• CRA : Central Record Keeping and Accountancy Agency

NPS

• Indian citizen between 18 and 55 years.• Based on Permanent Retirement Account Number (PRAN),• No investment ceiling.• Minimum investment limit has been fixed at Rs 500 a month or Rs 6,000

annually.• Subscribers are required to contribute at least once a quarter• Investments not guaranteed

• Choice in the investment mix– Equity or E (high risk but high returns),– Fixed income instruments or C (that come with medium risk and returns)– Pure fixed investment products or G (which offer low returns but have very low risks

associated with them).

NPS

• Equity investment is capped at 50 per cent.

• Retirement age fixed at 60 years.

• At 60, use at least 40 per cent of your accumulated savings to buy a life annuity from an insurance company.

• A phased withdrawal is also allowed but the lump sum benefit has to be availed before turning 70.

• In the current Budget, the Central government had announced that it would contribute Rs1,000 towards each New Pension Scheme account opened this year for the next 3 years.

NPS

• The investment is covered under section 80CCD of the Income Tax Act

• Tax will be levied for withdrawing the money (earned).

• One can avoid paying tax by transferring the entire corpus to the annuity service provider.

• PFRDA has approached the government to treat investment in NPS on a par with instruments like Employees Provident Fund and Public Provident Fund, for which no tax is levied at the investment, accumulation or withdrawal stage.

Thank You !

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