New Delhi, Aug. 23: The cabinet today cleared a new contributory pension scheme for central government employees and announced the formation of a pension regulator to oversee the rise of a new breed of pension fund managers who will be allowed to funnel retirement funds into the stock markets.
The new pension fund for government employees will apply only to those who joined service after October 1, 2002, but will not apply to the armed forces. The new pension system is based on defined contribution, shared equally between the government and the employees.
The government devised the new scheme as it wanted to put a lid on its ballooning pension bill which is projected to rise to Rs 23,158 crore this year (excluding the pension payout of the telecom sector).
The employee and the government will each contribute 10 per cent of the monthly salary and dearness allowance towards the pension fund. The pension contributions and accumulation will be accorded tax preference up to a certain limit.
The scheme also provides the individual with an option to exit at or after the age of 60. However, when they exit the scheme, they will be mandatorily required to invest 40 per cent of their pension wealth to purchase an annuity from a life insurance company.
State governments will have the option of offering the same scheme to their employees “as and when they decide the new system will be capable of accommodating the new participants”.
The cabinet also approved the formation of an interim Pension Fund Regulatory and Development Authority on the lines of the capital market watchdog, the Securities and Exchange Board of India (Sebi), and the Insurance Regulatory and Development Authority (IRDA).
Sushma Swaraj, the Union minister of health and parliamentary affairs, told reporters after the cabinet meeting that the system will have a central record-keeping and accounting infrastructure and several pension fund managers to basically offer three categories of schemes.
The three options — under which varying fund proportions can be shovelled into the stocks, gilts and bond markets — have been cleared in principle by the government but will be subject to regulatory restrictions and oversight by the pension regulator.
Individuals will be entitled to allocate their money according to their choice across any of these three options.
The pension fund managers will also be free to make investments in the international markets, though subject to regulatory restrictions.
The existing provisions of the gross provident fund would be withdrawn for those covered by the new pension scheme.
The interim pension regulator will be headed by a chairman and have four other members who will function under the administrative control of the finance ministry.
While two members will serve full time, the remaining two will be part-time members selected by the central government. The members are required to have knowledge and experience in economics, finance, legal and administrative matters.
Private insurers were agog over the prospect of entering the lucrative pension fund business. Many felt that the three investment options given by the government were “safe and sound”.
The roadmap for the restructured pension scheme for new central government employees was announced by former finance minister Yashwant Sinha in 2001.
In his budget speech in February this year, finance minister Jaswant Singh had said: “The new pension scheme will be portable, allowing transfer of the benefits in case of change of employment, and will go into ‘individual pension accounts’ with pension funds.”
There was no word on this in today’s press note on the subject issued after the cabinet meeting.
The Confederation of Central Government Employees and Workers condemned the decision to introduce a contributory pension scheme and threatened to go on strike if it was not withdrawn, adds PTI.