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Context: The Central government has appointed Deepak Mohanty as the new Chairperson of the PFRDA.
- Deepak Mohanty, a former full-time member of the Pension Fund Regulatory & Development Authority (PFRDA), has been named as the new chairperson of the PFRDA by the central government.
- The government announced that Mohanty will hold the highest PFRDA position until he turns 65 years old or until further orders, whichever comes first.
- He formerly held the position of Executive Director of the RBI, where he was responsible for the management of risk, internal audit and inspection, financial stability, monetary policy, economic analysis, and statistics.
Pension Fund Regulatory and Development Authority
- It is the statutory authority created by parliamentary legislation to oversee, promote, and guarantee the National Pension System (NPS).
- It is administered by the Directorate of Financial Services, Ministry of Finance.
- It is responsible for appointing several intermediary organisations, including Central Record Keeping Agency (CRA), Pension Fund Managers, and others.
- It also manages the Atal Pension Yojana (APY) in addition to developing, promoting, and regulating the pension market under the NPS.
Atal Pension Yojana (APY)
Old Pension Scheme (OPS)
- Earlier the Pension of the Centre and states government employees was fixed at 50% of the last drawn basic pay.
- For example: If a government employee’s basic monthly salary at the time of retirement was Rs 20,000, he/she would be assured of a pension of Rs 10,000.
- The monthly payouts of pensioners also increased with hikes in dearness allowance (DA) announced by the government for serving employees.
- DA is calculated as a percentage of the basic salary, it is a kind of adjustment the government provides to its employees and pensioners to make up for the steady increase in the cost of living.
- DA hikes are announced twice a year, generally in January and July.
- Currently, the minimum pension paid by the government is Rs 9,000 a month, and the maximum is Rs 62,500 (50% of the highest pay in the Central government, which is Rs 1, 25,000 a month).
- The Old Pension System was replaced by a New Payment System (NPS), which came into effect for employees joining government service from 1st January 2004,
- The New Pension System promises an assured or ‘defined’ benefit to the retiree. It is therefore described as a ‘Defined Benefit Scheme’.
Steps taken to reform the Pension System
- In 1998, the Union Ministry of Social Justice and Empowerment released a report for an Old Age Social and Income Security (OASIS) project.
- The OASIS project was not meant to reform the government pension system — its primary objective was targeted at unorganised sector workers who had no old age income security.
- The committee formed under the project noted that less than 11% of the estimated total working population had some post-retirement income security like a government pension, Employees’ Provident Fund (EPF), or the Employee Pension Scheme (EPS). The rest of the workforce had no means of post-retirement economic security.
- The OASIS report recommended that individuals could invest in three types of funds;
- Safe (allowing up to 10% investment in equity).
- Balanced (up to 30% in equity).
- Growth (up to 50% in equity)
- The balance would be invested in corporate bonds or government securities.
- The Union Ministry of Personnel, Public Grievances and Pensions set up a high-level expert group (HLEG) under B K Bhattacharya to look into the situation for government employees.
- The HLEG suggested 2 types of hybrid defined benefit/ defined contribution schemes for government employees.
- Type 1: It recommended a 10% contribution by the employer and the employee. The accumulated funds would be used to pay pension in annuity form.
- Type 2: No limit was specified for the employee, but the employer’s contribution would be matching but limited to 5%. Accumulated funds could be withdrawn in lumpsum or converted into an annuity. These incomes would be tax-exempt.
- The report was submitted in 2002, but not accepted by the government.
Origin of the New Pension Scheme (NPS)
- The Project OASIS report became the basis of the New Pension System.
- NPS was originally designed for unorganised sector workers and was adopted by the government for its employees.
- NPS for Central government employees was notified on December 22, 2003, and it was made mandatory for all recruits joining government service from January 1, 2004.
- The defined contribution comprised 10% of the basic salary and dearness allowance by the employee and a matching contribution by the government, In January 2019, the government increased its contribution to 14% of the basic salary and dearness allowance.
Significance of NPS
- Simple – Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number it remains with the subscriber throughout his lifetime.
- Flexible - NPS offers a range of investment options and choices of Pension Funds (PFs) for planning the growth of the investments reasonably and monitoring the growth of the pension corpus.
- Subscribers can switch over from one investment option to another or from one fund manager to another.
- Portable- NPS provides seamless portability across jobs and locations. It would provide a hassle-free arrangement for the individual subscribers while he/she shifts to the new job/location, without leaving behind the corpus build, as happens in many pension schemes in India.
- Well Regulated- NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA), with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust.
- The dual benefit of Low Cost and Power of compounding: Till retirement, pension wealth accumulation grows over the period with a compounding effect.
- Ease of Access: The NPS account is manageable online. An NPS account can be opened through the e-NPS portal. Further contributions can also be made online through the following eNPS portals.
Q. Consider the following Statements;
1. Earlier under the Old Pension Scheme, the Pension of the Centre and states government employees was fixed at 50% of the last drawn basic pay.
2. The Old Pension System was replaced by the New Payment System (NPS) in 2014.
Which of the following statement is/are correct?
(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2
Statement 1 is correct: Under the Old Pension Scheme (OPS), the Pension of the Centre and state government employees was fixed at 50% of the last drawn basic pay.
For example: If a government employee’s basic monthly salary at the time of retirement was Rs 20,000, he/she would be assured of a pension of Rs 10,000.
Statement 2 is incorrect: The Old Pension System was replaced by a New Payment System (NPS), NPS for Central government employees was notified on December 22, 2003, and it was made mandatory for all recruits joining government service from January 1, 2004.