pension & insurance

7/29/2019 Pension & Insurance

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Lecture XIX

Insurance Companies andPension Funds

PART I

FINANCIAL INSTITUTIONS

INSURANCE COMPANIESTrimester II

FIM


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Insurance Companies and

Pension Funds

These two non bank institutions also take

funds from one sector and invest them inanother, like other financial intermediaries


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Insurance Companies

Insurance companies assume the risk of theirclients in return for a fee, called the premium

Most people purchase insurance because theyare risk-aversethey would rather pay acertainty equivalent (the premium) than accepta gamble

Insurance benefits peoples lives by reducing the

size of reserves they would have to maintain tocover possible loss of life or property


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Seven basic principles applicableto all insurance companies

1. There must be a relationship between the insured andthe beneficiary. Further, the beneficiary must besomeone who would suffer if it werent for the insurance.

2. The insured must provide full and accurate informationto the insurance company.

3. The insured is not to profit as a result of insurancecoverage.

4. If a third party compensates the insured for the loss, theinsurance companys obligation is reduced by the

amount of the compensation.


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Seven basic principles contd.

5. The insurance company must have a largenumber of insured so that the risk can be spreadout among many different policies.

6. The loss must be quantifiable. For example, anoil company could not buy a policy on anunexplored oil field.

7. The insurance company must be able tocompute the probability of the losss occurring.


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Adverse Selection and Moral Hazardin Insurance

Asymmetric information plays a large rolein the design of insurance products. Aswith other industries, the presence ofadverse selection and moral hazardimpacts the industry, but is fairly wellunderstood by the insurance companies.


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Adverse Selection in Insurance

The adverse selection problem raises theissue as to which policies, an insurancecompany should accept.

Those most likely to suffer loss are mostlikely to apply for insurance.

In the extreme, insurance companiesshould turn down anyone who applies foran insurance policy.


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Response to the Problem ofAdverse Selection in Insurance

Insurance companies have found reasonablesolutions to deal with this problem:

Screening of applications

Risk based premium

Health insurance policies require a physicalexam

Pre-existing conditions may be excluded fromthe policy


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Moral Hazard in Insurance

Moral hazard occurs in the insuranceindustry when the insured fails to takeproper precautions (or takes on more risk)to avoid losses because losses are coveredby the insurance policy.

Insurance companies use deductibles tohelp control this problem.


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Types of Insurance

Insurance is classified by which type ofundesirable event is covered:

Life Insurance

Health Insurance

Property and Casualty Insurance


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Growth and Organization of LifeInsurance Companies in the US

The number of insurance companies grewsteadily until 1988, and since then thenumber has fallen steadily.

This can be seen in the next slide.


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Number of Life Insurance Companies in the U.S., 1950-2002

Growth of Life Insurance Companies in US


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Organization of Life Insurance Companies

The previous slide also shows that Life insurancecompanies may be organized in twodifferent ways:

A stock company is owned by shareholders and hasa profit motive

A mutual insurance company is owned by thepolicyholders and attempts to provide the lowestcost insurance

At the end of 2002, only 83 of 1159 Lifeinsurance companies in the US were mutualinsurance companies.


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Life Insurance

Life insurance policies come in many forms.Some of the typical policies include:

Term Life: the insured is covered while the policy

is in effect, usually 1020 years.

Whole Life: similar to term life, but allows thepolicyholder to borrow against the policies cash

value. When the term of policy expires, theinsured can get the then cash value of thepolicy.


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Some more typical policies

Universal Life: includes both a term life

portion and a savings portion.

Annuities: pays a benefit to the insured untildeath, to cover retirement years.


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Expected Life of Personsat Various Ages in US


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Basic Principles for Investments

Because life insurance liabilities are verypredictable, these insurers are able toinvest in long term assets

Property and casualty insurancecompanies have to keep their assets moreliquid to pay out on unexpected losses


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Life Insurance Companies: Liabilities

Life insurance companies have two primaryliabilities:

Life insurance payouts

Pension fund payouts


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Life Insurance CompaniesInflow of funds and Investment of Assets

Life insurance companies derive funds from two sources: They receive premiums that must be used to payout future

claims when the insured dies

They receive premiums paid into pension funds managed by thelife insurance company

The next two slides show the distribution in US of

the typical life insurance companys assets (2003) in various

classes, including mortgages (the term represents mortgage loans& direct real estate investment; and

trend of assets invested in mortgages (from 1920 to 2004). Thedecline therein reflects a shift to lower-risk assets (as aconsequence of losses suffered by some insurance companies inthe 80s) and the decline has been offset by increased investment incorporate bonds and government securities


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Distribution of Life Insurance Company Assets (beginning of 2003)

Life Insurance Company in USAssets Break up


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Percentage of Life Insurance Company Assets Invested in Mortgages

Life Insurance CompanyAssets invested in Mortgages


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Health Insurance mostly through Group Policies

Health insurance policies are highlyvulnerable to the adverse selectionproblem. Those with known or expected

health problems are more likely to seekcoverage.

Thus mostly health insurance is offered

through group policies. Individual policies are priced assuming

adverse selection.


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Meaning ofNamed-Peril & Open-Peril Policies

Property Insurance: protects businesses andowners from the risk associated with ownership.

Named-peril policies: insures against any

losses only from perils specifically named inthe policy

Open-peril policies: insures against any

losses exceptfrom perils specifically named inthe policy

P I & C l I


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Property Insurance & Casualty Insurance

Re-insurance

Casualty Insurance: also known as liabilityinsurance, protects against liability for harmthe insured may cause to others as a resultof product failure or accidents.

Motor insurance in a combination ofproperty & casualty insurance

Re-insurance: allocates a portion of the riskto another company in exchange for aportion of the premium.


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Insurance Regulation in US

The McCarran-Ferguson Act of 1945 explicitlyexempts insurance companies from any typeof federal regulation.

In the US, most insurance regulation is atthe state level

Regulation is typically designed to protectpolicyholders from losses, or expandinsurance coverage in the state.

Who takes care of regulation of insurancein India?


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Indian RegulatorInsurance Regulatory and Development Authority

Composition of Authority under IRDA Act, 1999

Section 4 of IRDA Act 1999, specifies thecomposition of Insurance Regulatory

and Development Authority (IRDA). TheAuthority is a ten member teamappointed by the Government of Indiaconsisting of

(a) a Chairman;(b) five whole-time members;(c) four part-time members.

INDIAN INSURANCE INDUSTRY


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INDIAN INSURANCE INDUSTRYHistorical Background

Insurance industry, as on 1.4.2000, comprised mainly just twoplayers, both state-owned:

Life Insurer:Life Insurance Corporation of India (LIC)

General Insurer: General Insurance Corporation of India (GIC) (with

effect from Dec 2000, a National Reinsurer)

GIC had four subsidiary companies, namely (with effect from Dec2000, these subsidiaries were de-linked from the parent companyand made independent insurance companies.

The Oriental Insurance Company Limited

The New India Assurance Company Limited

National Insurance Company Limited

United India Insurance Company Limited.

Th t f i t i
http://www.licindia.com/http://gicofindia.in/http://www.orientalinsurance.nic.in/http://www.newindia.co.in/http://www.nationalinsuranceindia.com/http://www.uiic.co.in/http://www.uiic.co.in/http://www.nationalinsuranceindia.com/http://www.newindia.co.in/http://www.orientalinsurance.nic.in/http://gicofindia.in/http://www.licindia.com/


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The story of private insurancebegan in India during 2000

Life Insurance: 10 New Entrants in 2000 & 2001 Non Life Insurance : 6 New Entrants during 2000

& 2001 (largest sub-segments in descending orderinclude motor over 40%, health, fire & marine)

26 companies have entered the business of life(12) & non-life (14) insurance thereafter

Two of the companies which are in the non-life

insurance business are exclusively providing healthinsurance


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INSURANCE BUSINESS: BASICS

Life Insurers transact life insurancebusiness; general Insurers transact therest. No composites are permitted as perlaw.

LEGISLATION: Insurance is a federalsubject in India.

The primary legislations that deal with

insurance business in India are: Insurance Act, 1938, and

Insurance Regulatory & DevelopmentAuthority Act, 1999


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Insurance Products: An Overview Life Insurance:

Popular Products: Unit linked Insurance Policies (ULIPS),Endowment Assurance (Participating), and Money Back(Participating) are the popular products. Various otherproducts have also been launched by life insurers

Money back policy provides for periodic payments ofpartial survival benefits during the term of the policy, aslong as the policyholder is alive. They differ fromendowment policy in the sense that in an endowmentpolicy survival benefits are payable only at the end of theendowment period.

General Insurance:

Motor Vehicle insurance is compulsory. Thereafter, Fireand Health insurance businesses are predominant.

Tariff Advisory Committee (TAC)

used to earlier lay down tariff rates for some of the

general insurance products


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CUSTOMER PROTECTION:

Insurance Industry has Ombudspersons in 12cities

Each Ombudsman is empowered to redresscustomer grievances in respect of insurancecontracts on personal lives, where the

insured amount is less than Rs. 20 lakhs, inaccordance with the Ombudsman Scheme


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APPROVED INVESTMENTSExhaustive lists are given in the guidelines issued by IRDA forinvestment of funds by the insurance companies.

Broadly, the various categories of approved investmentsinclude the following:

CENTRAL GOVERNMENT SECURITIES

STATE GOVERNMENT/OTHER APPROVED SECURITIES/OTHERGUARANTEED SECURITIES

APPROVED TERM LOANS/BONDS/DEBENTURES RELATED TOHOUSING & LOANS TO STATE GOVERNMENTS FOR HOUSINGAND FIRE FIGHTING EQUIPMENTS

APPROVED INFRASTRUCTURE/SOCIAL SECTORINVESTMENTS

CERTAIN APPROVED INVESTMENTS SUBJECT TO EXPOSURENORMS

CERTAIN OTHER CATEGORIES, OTHER THAN ABOVE

MENTIONED APPROVED INVESTMENTS


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Approval of Products by IRDA

The products offered by the insurancecompanies are approved by IRDA

For every product/rider, there is a UIN(Unique Identification Number) allotted byIRDA

Micro Insurance Products (MIP) offered byvarious companies are also approved byIRDA and a UIN is allotted to each MIP


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Insurance Agents: Training Agents are not on the payroll of the insurance company.

The insurance agents get a fixed commission on each

policy they sell Composite Agent is one who sells both life and general

insurance policies

The applicant has to undergo at least 100 hourspractical training in life or general insurance businesswhich may be spread over three to four weeks, wheresuch applicant is seeking license for the first time to actas an insurance agent. The training institutes arerequired to cover the syllabus prescribed by theAuthority during this period

Once the training is complete, the candidate is eligibleto appear for an online examination conducted by IRDA,and would require at least 50% marks for qualifying

The agent is supposed to renew his license after threeyears, by putting in another 25 hours (and 50 hours for

composite insurance agent) of training


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Comprehensive Regulations: IRDA

There are comprehensive guidelines issued by IRDA,

in regard to various aspects, including: Appointment of actuaries

Insurance Agents

Training of insurance agents

Corporate Agents

Ombudsmen

Surveyors

TPAs for health services Submission of annual and other reports

Insurance awareness campaigns

Grievance cells

Insurance Companies and


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Insurance Companies andPension Funds

Pension Funds

Trimester IIFIM Lecture XIX Part II


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Pensions: The US Perspective

Definition:A pension plan is an asset pool thataccumulates over an individuals working years

and is paid out during the non-working years.

Developed as Americans began relying less ontheir children for care during their later years.

Also became popular as life expectancy

increased.


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Types of Pensions: Defined Benefit Plan

Defined-Benefit Pension Plans: a planwhere the sponsor promises the employeea specific benefit when they retire.

For example:Monthly Retirement Payment =

(50% of monthly average of Last 12 monthsBasic Pay plus dearness Allowance) * (No

of years of service / 30)


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More on Defined Benefit Pension Plans

Defined-Benefit Pension Plans place aburden on the employer to properly fundthe expected retirement benefit payouts.

Fully funded: sufficient funds are available to

meet payouts Over-funded: funds exceed the expected

payout

Under-funded: funds are not expected to meetthe required benefit payouts


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Some other types of Pension Plans Defined-Contribution Pension Plan:

a plan where a set amount is invested for retirement, but thebenefit payout is uncertain.

Benefits depend on the returns generated by the plans

Private Pension Plans:

any pension plan set up by employers, groups, orindividuals

Most private pension plans in US are insured by thePension Benefit Guarantee Corporation, which paysbenefits when the plans sponsor goes bankrupt or is

otherwise unable to make payments Public Pension Plan:

Any pension plan set up by a government body forthe general public (e.g., Social Security in the US,

which is the largest public pension plan)


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Distribution of Private Pension Plan Assets (end of 2003)LOOK AT THE PROPORTION OF FUNDS INVESTED IN

STOCKS

Investment of Private Pension Plan Assets


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Worries on Social Security in US Social Security System in the US is a Pay as

you go system, where current funding is used(partially) to pay current benefits

So, in a way, the current retirees are receivingpayments from current workers

Projected number of workers is falling whileprojected number of retirees is increasing

This is receiving increasing attention becauseof the fear that the amount being paid into thesocial security system in future may not besufficient for the sums to be paid out


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Past Social Security Assets: 1957-2003

Social Security Fund Assets, 19572003


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Projected Social Security Trust Fund Assets

Projected Social Security Assets: 1998-2038

Big Jump in Pension Plans


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Big Jump in Pension Plansafter a Supreme Court Ruling in US

A major U.S. Supreme Court decision in1949 established that pension benefitswere a legitimate part of collective

bargaining.

The number of plans increased after this asunions negotiated for such plans.


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Regulation of Pension Plans in US

Employee Retirement Income Security Act of 1974

ERISA established guidelines for funding

Allowed plan credit to transfer with employees

Established vesting requirements to gainplan benefits

Increased disclosure requirements

Assigned regulatory oversight by departmentof labor

401(K) Plans IRAs and Roth IRAs in US


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401(K) Plans, IRAs and Roth IRAs in US In 1978, the congress amended the Internal Revenue

Code by adding section 401(k), whereby employees arenot taxed on income they choose to receive as deferredcompensation rather than direct compensation. The lawwent into effect on 1 Jan 1980

In the mid-1980s, there were fewer than 8 millionparticipants with less than $100 billion of assets in

401(k) plans. By 2006, there were seventy millionparticipants with more than $3 trillion of assets in 401(k)plans

Section 401(k) plan proved popular with workers at alllevels because it had higher yearly contribution limits

than the Individual Retirement Accounts (IRA); it usuallycame with a company match, and in some waysprovided greater flexibility than the IRA

The other variant of the IRA account is the Roth IRA. Incontrast to a traditional IRA, contributions to a Roth IRA

are not tax-deferrable. Withdrawals are generally tax-free


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The Future of Pension Funds

We can expect their growth and popularity asthe average age of population continues togrow.

Variety of pension fund offerings mayincrease as well.

Pension funds may gain significant control of

corporations as their stock holdings increase.

Lot of big companies in the world


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Lot of big companies in the worldalso in deep waters

Japans top 278 companies were a combined

21.5 trillion yen ($235.7 billion) behind on theirpension funding in fiscal 2009, a 50 percentincrease from the previous year, according tothe Daiwa Institute of Research in Tokyo.

Hitachis unfunded liabilities totaled 1.1 trillionyen

The pension plans suffer from two decades ofslumping markets, an aging population and adependence on packages that are immune to

investment performance. Japan Inc. stuck with defined-benefit plans

even as the countrys stock market has slid andinterest rates have hovered near zero.

JAL Pension Shortfall May Prompt


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JAL Pension Shortfall May PromptJapan Inc. to Change Its Ways

The news about Japan Airlines Corp.s$25.5 billion bankruptcy a year ago may bethe impetus for companies including HitachiLtd. and Toyota Motor Corp., Japans

biggest private employers, to shore up theirdeficit-ridden pension plans.


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Worldwide moves towards Private Retirement Systems Driven by fears about the un-sustainability of their social

security programmes, many countries have initiated thedevelopment of multi-pillar pension systems, whichseek to integrate both public and private components.

This has led to a rapid growth of mandatory as well asvoluntary privately managed pension funds and reducedthe reliance on public social security systems.

These new private retirement systems are oftensupported by the state with tax incentives.

When mature, they will control a substantial portion ofthe financial assets in an economy and exerciseconsiderable influence over the allocation of capital andthe financial well-being of a large section of thepopulace.


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Present Indian pension system

The present Indian pension system islargely publicly managed and tightlycontrolled.

Proposals have been made over the yearssuggesting introduction of privateparticipation, in order to:

expand coverage,

increase returns, and

improve efficiency.

Absence of a social security programme in India


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Absence of a social security programme in India

India does not have what is commonly referred to

as a first pillar social security programme, thatprovides significant income replacement for themajority of the population, as is common in mostadvanced countries.

The central government operates a variety ofpoverty alleviation programmes funded out of itsgeneral tax revenues targeted at people below thepoverty line.

However, there is no public system run out of thegovernments budget to which citizens contribute

and receive benefits.

Mandatory Occupational Plans for organized sector for


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Mandatory Occupational Plans for organized sector forprovision of Retirement Income Security in India

Mandatory occupational plans forming what is typically termed a

second pillar are presently the mainstay of retirement incomesecurity.

These plans, however, cover only the salaried workers employedin specified industries and classes of establishments that arenotified by the government, which cover most of the organised

sector. Such occupational arrangements utilise a dual benefit structure,

with each employee generally being a member of a DC plan that

is not annuitised and allows early withdrawals for somespecified purposes (called a provident fund), as well as a DB

plan that pays a life pension (called a pension fund). Rates ofcontribution are high, ranging from 20% to 24% of salary.

In addition, most of the salaried workers in the organised sectorare also entitled to a lump-sum retirement benefit calledgratuity, generally computed at half-months salary for every

year of completed service.

Third Pillar for the Un organized Sector


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Third Pillar for the Un-organized Sector

The majority of the labour force consisting of self-

employed workers, casual workers and most of thoseemployed in the unorganised sector do not havemandatory coverage.

For them, voluntary individual saving (the third pillar in a

multi-pillar system) is the only means of providing forincome in old age.

The government and the insurance companies offer long-term savings plans that are aimed at enabling such

workers to save for their retirement. These individual voluntary plans as also the mandatory

occupational plans are supported in India with strong taxincentives.

Mandatory coverage for salaried employees


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Mandatory coverage for salaried employees

The total number of regular salaried workers in thecountry is over 6 crores.

Mandatory coverage for retirement plans in Indiaextends only to salaried employees who can becategorised as follows:

Government employees who are covered under the

governments pension system, Salaried employees in establishments covered by the

EPF Act,

Salaried employees in establishments covered under

special Acts, and

Salaried employees in establishments not coveredunder the EPF Act but have equivalent voluntaryarrangements (such establishments are mostly in the

public sector).

Regulatory Framework for Pension System in Recent Times


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Regulatory Framework for Pension System in Recent Times

Until recently, regulation of provident and pension funds in Indiacame out of three sources:

o Income Tax Act of 1961,o EPF Act of 1952 (or other special Act governing the fund), and

o Indian Trusts Act of 1882.

Every provident and pension fund trust, as also every gratuity andsuperannuation trust, is required to obtain approval under the

Income Tax Act for its income to be treated as tax-exempt.

Such an approved trust is required to comply with the provisions ofSchedule IV to the Income Tax Act.

The chief requirement under Schedule IV is compliance with the

investment limitations prescribed by the Ministry of Finance. The effect of this provision is that a common investment pattern

applies to all types of provident, pension, superannuation andgratuity funds in India, whether or not they are governed by the EPFAct.

The above is not applicable to the recently introduced NPS.

Need for Unified Regulation


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Need for Unified Regulation The EPF Act governs the EPFO and is also the chief

source of regulation for the Exempted Funds

The Indian Trusts Act applies to all trusts and deals withthe rights and obligations of the trustees and thebeneficiaries

The legislation governing supervision of provident and

pension funds has thus been fragmented and there wasno one regulator who supervises all funds

Pension reforms in India needed to establish unifiedregulation affecting all retirement funds and an

independent regulator with jurisdiction over all funds A major step forward has since been taken with the

establishment of Pension Fund Regulatory andDevelopment Authority (PFRDA) by the Government of

India on 23rd August 2003, which is dealt with later


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Employees Provident Fund Organisation

The Organisation functions under theoverall superintendence of the policiesframed by the Central Board of Trustees, a

tripartite body headed by Union Minister forLabour as Chairman.

The Chief Executive Officer of the

organisation is the Central Provident FundCommissioner, who is also a member ofthe board and its secretary.

EPFO O i l S i i 31 3 09


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EPFO - Operational Statistics: 31.3.09

No. of covered establishments as on 31.03.2009: 573063

Membership of persons as on 31.03.2009 in crores:-

In Employees Provident Fund: 4.71

In Pension Fund: 4.49

Cumulative contributions (Rs in crores):-

In Employees Provident Fund: 211677.37

In Pension Fund: 98242.05

Employees Deposit Linked Insurance Fund : 7457.69

Total Contribution 317377.11

Trust organisation for managing funds


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Trust organisation for managing funds

All provident, pension, superannuation and

gratuity funds have been required to be set up asindependent trusts.

Exempted Funds are set up as irrevocable trustssponsored by the employer.

Trust deeds are required to be registered andfiled with the EPFO for obtaining exemption.

The Indian Trusts Act of 1882 governs all trusts,

addressing many of the agency issues. Thefiduciary duties, powers and liabilities of a trusteeandthe rights of a beneficiary are defined in theTrusts Act.

PFRDA


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PFRDA

PFRDA was established by Government ofIndia on 23rd August, 2003.

The PFRDA Bill, 2005 is awaiting approval ofParliament.

Pending passage of the Bill, the Governmenthas, through an executive order dated 10thOctober 2003, mandated PFRDA to act as aregulator for the pension sector.

The mandate of PFRDA is development andregulation of pension sector in India.

Current Scenario: Standardized Plans/Portability


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Current Scenario: Standardized Plans/Portability

Employers are granted permission, by the governmentin consultation with the EPFO, to set up Exempted

Funds if their contribution and benefit structure are notinferior to the EPF plans.

In practice, the contribution rates, benefits and therights of beneficiaries including vesting rights are

almost identical across the country.

Due to the restrictions imposed by the investmentregulations there was no choice regarding portfolios tothe employers or the employees.

Portability is an important principle of pensionregulation; it was made easy in India by the dominanceof the EPFO. As most of the employers subscribed toEPFO plans, relocation of workers among those was

handled by a simple declaration to the EPFO.

Earlier highly Restrictive Investment Regulations


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Earlier highly Restrictive Investment Regulations

Investment requirements and limitations are thecore of the regulation and control of provident

and pension funds.

The laws of the country had imposed what wasoften viewed as a highly restrictive investment

regulation regime. Funds in India could not earlier invest in stocks

or mutual funds.

No investments were also permitted in non-tradable investments such as loans or deposits(including bank deposits).

Investments were mostly directed to the

government and its enterprises.

Non-sustainability of the earlier System


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Non sustainability of the earlier System

While the model may have worked in the past, a virtuallypublicly managed system with administered returns

could not be supported in the liberalised era The government has so far implicitly assumed

responsibility for all retirement savings by directingsuch savings to be channeled to itself or its enterprises

and paying what would be considered an attractivereturn

In effect, the government had underwritten the pensionsystem with tax-payers money

The government had also assumed fund managementresponsibility, with more than 70 percent of the corpusof provident and pension funds being under the EPFOplans.

Huge contingent liability for DB pension plan of EPFO


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Huge contingent liability for DB pension plan of EPFO

The government has assumed the huge contingent liability for anydeficit in the DB pension plan of the EPFO, which is unsustainable.

Pension plans all over the world have tended to migrate to DCplans from DB plans. Where DB plans do exist, the liability for themrightfully belongs to the employer and not the tax-payer.

Inevitably, the DB plan of EPFO will need to be reformed into a DCplan or a privately managed DB plan for which the employer

assumes liability.Central Government Employees Pension Plan

The governments own pension system also has

evidently been in need of reform.

The solution was transition to privately managed andfunded plans based on defined contributions, which hasnow come about with the move to NPS for the newrecruits of the central government.

N E l f C t l G t t NPS


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New Employees of Central Govt. move to NPS

The New Pension System (NPS) reflects theGovernments effort to find sustainable solutions tothe problem of providing adequate retirement income.

As a first step towards instituting pensionreforms, the GOI moved from a defined benefit

pension to a defined contribution based pensionsystem by making it mandatory for its new recruits(except armed forces) w. e. f. 1st January, 2004.

Since 1st April, 2008, the pension contributions ofCentral Govt. employees covered by NPS are being

invested by professional Pension Fund Managers.

The Basics of NPS


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The Basics of NPS NPS is the lowest cost, portable and no-load product

that is possibly the best in terms of its structure,

across the world. The account-holders contributiongoes into a fund of his choice out of a universe of sixfund managers, offering a choice of three funds each.At the most, half the money can go into an index-linked equity fund, the rest in safer debt products.

This account is locked till the age of 60. On maturity,the person can withdraw up to 60% of the corpus aslump sum and the rest will buy an annuity, from anyof the insurers.

If the account-holder does not want to choose the

fund, the default option puts him in an assetallocation that is linked to his current age. As theperson ages, the allocation will change in favour ofdebt.

Some more basics of NPS


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So e o e bas cs o S A Central Record keeping Agency, National Stock

Depository Limited (NSDL), which is the sole CRA underthe system, acts as the backbone of the NPS by hostingand facilitating transactions.

The CRA allots a unique permanent retirement accountnumber (PRAN).

This number is portable across geographical locations,

banks and employers. Costs is another area that puts NPS ahead of other

competing products

Portability across funds, once a year, also allows greaterflexibility to the investor.

The regulator has also launched the Tier II account,which works on a similar backbone. The only differenceis that of flexibility - you can withdraw anytime you like.Both contribution & maturity are however subject to tax.

Budget 2010: NPS


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Budget 2010: NPS New Pension Scheme Push

A renewed push has been given to the New PensionScheme in the last Budget.

Till now the New Pension Scheme has not found muchfavour from the public due to teething problems related to

its implementation and certain other factors. Budget 2010 had proposed to give Rs.1000/- as a starting

incentive to all accounts of NPS opening in the next 3years.

This is a welcome measure, as NPS will possibly becomethe key Contributory Social Security Scheme in India.

pension & insurance

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