NPS: Options and safety

It is your money, your future; you decide. This principle lies at the core of the New Pension System (NPS) introduced by the central government for all fresh recruits except those entering the defence services from 1 January 2004.

The NPS is a contributory scheme fresh recruits in the Centre and dozen-odd states have to sign up for. Every employee opens a personal retirement account on joining. Every month, 10 per cent of the salary and DA are transferred to this account along with a matching contribution by the employer. This money will go to a pension fund manager selected by the employee. The latter can invest in low interest but safe government securities, secure corporate bonds that offer a slightly higher rate and equity, which can give high returns but is riskier.

This is the Tier 1 account in which employees get tax exemptions. But no pre-retirement withdrawals are allowed. On retirement, at least 40 per cent of the money has to go for buying annuities from the insurance market. This, to provide employees' families with a steady source of income. The remaining 60 per cent can be withdrawn. Those opting for voluntary retirement can exit before 60 but will have to buy annuities for 80 per cent of the accumulated amount.

There is also a default option: money will be handled by a public sector fund manager, who's likely to invest in government securities. No NPS member will be eligible for General Provident Fund or gratuity. So, what happens in the "rainy day" scenario, when an employee wants to withdraw money before retirement? For that, there's the Tier II account. These contributions will not be tax exempt but can be withdrawn any time.

Once an individual opens an ac count, he will have to deposit a minimum amount of money, say Rs 500 per annum. The NPS envisages that this can be done at any post office or bank: "points of presence" (PoP) in the jargon. Every deposit can be split across schemes and fund managers. Information about contributions will be passed on to a proposed Central Record-keeping Agency (CRA). CRA will pass on the money and instructions on investment profiles to fund managers.

The service can't come for free. Employees will have to pay CRA, PoP and fund managers. This is crucial. Other pension reforms have unravelled because these charges are too high. Annual fund management fees can look low. But, over time, the effect can be dramatic, reducing benefits by 30 to 50 per cent. Since many future contributors will be low income earners, a proper fee structure is even more crucial for India.

Can you trust the fund managers, even if their fees are low? The NPS will work like a mutual fund. The fund manager won't "own" the money. A trust set up by the pension regulator will hold your money for you. Contrary to what the Left is saying, no one can take your money and run.