THE POLICY LAB (TPL) - 52
SEPTEMBER 21, 2024

By J B Mohapatra

A: BASED solely on publicly available information on the Cabinet decision dated 24-8-24 and even without the detailed operating documents on the Unified Pension System (UPS) and the corresponding rules of its procedure qua the National Pension System (NPS), some elements of UPS are apparent. For example (a) an assured pension of 50 % of the average basic pay drawn over the last 12 months prior to superannuation for a minimum qualifying service of 25 years. This pay is to be proportionate for lesser service period up to a minimum of 10 years of service ; (b) assured family pension of 60% of pension of the employee immediately before her/his demise ; (c) an assured minimum pension of Rs 10,000 per month after minimum 10 years of service; (d) an assured inflation indexation on pension, family pension and minimum pension ; (e) a lump-sum payment at superannuation in addition to gratuity; (f) 1/10th of monthly emolument as on the date of superannuation for every completed six months of service. Additionally, few other features of UPS are also apparent: (a) UPS being available as an option to the employees, both existing and future employees; but choice, once exercised, will be final ; (b) employee contribution will not increase qua NPS and remain at 10%, but government contribution will increase from 14 to 18.5% ; (c) UPS to be effective from 1.4.2025.

B: The other part , that is the proposed re-location of subscribers' funds from NPS to UPS at the funding and disbursement level, its architecture and implementation mechanism, the available policy options for re-location of the subscribers' funds, and the innovation if any proposed on an existing policy option, on the contrary, are not presently known, though the current status of NPS at the fund level is widely known and disseminated.

Certain data from the annual report of National Pension Systems Trust, the body established by Pension Fund Regulatory and Development Authority (PFRDA) to oversee the assets and funds under NPS, for the year ending 31-3-24 would be relevant here:

The cumulative value of all Assets under Management (AUM) by the 12 PFRDA approved Pension Funds is Rs 11,73,536 Cr.

Pension Funds managed by 3 companies (out of the total 12 approved pension fund companies) respectively established by SBI, LIC and UTI account in excess of 90% of total AUM.

Out of a total NPS subscriber base of 1.81 Cr, 37% are from the State Governments and 14% are from the Central Government

AUM of Central Government subscribers is Rs 3,03,145 Cr and that of State Governments is Rs 5,73,527 Cr

Classification of AUM of Rs 11,73,536 Cr by the Pension Funds engaged with NPS on asset class basis are - Rs 6,36,131 Cr (54.21%) in government securities, Rs 2,78,448 Cr (23.73%) in corporate bonds, Rs 2,21,856 Cr (18.90%) in equities, Rs 1,195 Cr (O.10%) in alternative investments, Rs 35,906 Cr (3.06%) in FDs/ units in mutual funds/ net current assets.

C: Given the enormity of the tasks associated with UPS, here below are certain statutory and public finance issues, which no doubt will subsequently get addressed prior to implementation of UPS. Statutory issues in PFRDA Act first.

D: Inclusion of UPS for ensuring its regulation under any existing statute or formulating a special statute for the purposes of UPS, since no pension scheme remains outside the ambit of statutory supervision of one kind or the other.

Section 12 of PFRDA Act in that context reads as follows:

"12. (1) This Act shall apply to-

(a) the National Pension System;

(b) any other pension scheme not regulated by any other enactment

……..

(5) Notwithstanding anything contained in clause (c) of sub-section (3), the Central Government may, by notification, extend the application of this Act to any other pension scheme [including any other pension scheme exempted and notified under clause (c) of sub- section (3).

Whether the default clause in 12(1)(b) or the prerogative of the Central Government provided in section 12(5) above should suffice if a decision to include UPS within the scope of PFRDA Act should be a matter for consideration.

E: Also due for consideration should be section 20 and 14 of PFRDA Act, which read as below:

"20. National Pension System.- (1) The contributory pension system notified by the Government of India in the Ministry of Finance vide notification number F. No. 5/7/2003-ECB&PR, dated the 22nd December, 2003, shall be deemed to be the National Pension System with effect from the 1st day of January, 2004, and such National Pension System may be amended from time to time by regulations"

………..

"14. Duties, powers and functions of Authority.- (1) Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty, to regulate, promote and ensure orderly growth of the National Pension System and pension schemes to which this Act applies and to protect the interests of subscribers of such System and schemes"

Mandate under the statute for PFRDA to regulate the NPS need be expanded to include the UPS, in case PFRDA is designated as the authority to administer the UPS as well. In case another Authority is designated to administer UPS or it is decided to do away with any specific Authority to administer UPS, suitable changes to the extant legislation should be a statutory requirement.

F: Equally critical should be sections 2 (l) and section 23 of the PFRDA Act, which define and lay down the scope of statutory activities that a Pension Fund can be engaged in.

"2(l) - pension fund means an intermediary which has been granted a certificate of registration under sub-section (3) of section 27 by the Authority as a pension fund for receiving contributions, accumulating them and making payments to the subscriber in the manner as may be specified by regulations; "

…………

"23. Pension funds.- (1) The Authority may, by granting a certificate of registration under sub-section (3) of section 27, permit one or more persons to act as a pension fund for the purpose of receiving contributions, accumulating them and making payments to the subscriber in such manner as may be specified by regulations.

(2) The number of pension funds shall be determined by regulations and the Authority may, in public interest, vary the number of pension funds:

Provided that at least one of the pension funds shall be a Government company"

Criticality of these clauses are on account of following :

First, the whole basis of establishing NPS as a contributory pension scheme with no defined benefits for subscribers is captured in section 20(2) (g) of the PFRDA Act, which reads as below:

"there shall not be any implicit or explicit assurance of benefits except market based guarantee mechanism to be purchased by the subscriber;"

UPS on the contrary is anchored on the principle of defined benefit. Pension Funds for UPS thus cannot be regulated under the PFRDA Act as the Act stands now, unless the provision for defined benefit is implanted in to that Act.

Second, obligations of Pension Funds under the PFRDA Act comprise the entire bouquet of 3 activities, and not just one or two of the activities- from receiving contributions, accumulating them and making payments to the subscribers. Thus if pension is defined, definite and assured, and if disbursal of guaranteed pension is left out of the mandated activities of the Pension Fund under the UPS and inter alia proposed for being directly handled by the Government at par with the OPS, the approved Pension Fund under the PFRDA Act administering NPS may not satisfy the conditionalities under section 2(l) of the Act if it were to administer UPS as well. A valid question also will arise whether PFRDA continues to retain its right to being a regulator of the Fund in respect of UPS, if UPS foists only the 2 responsibilities- receiving contributions and accumulating them- with the fund manager.

G: As regards allied issues associated with re-location of subscribers' funds to UPS after the subscribers with NPS exercise their choices, there of course could be examination of various models: (i) letting the existing Pension Funds of NPS manage the employees' and employer's contributions to UPS after necessary changes to the extant legislation or (ii) setting up a different class of Funds distinct from the NPS Pension Funds under a new legislation specifically for UPS and transferring to the new set of Funds the balances in the subscribers' NPS accounts and allowing the new Funds access to employees' and employer's contributions under UPS for making investments, once UPS comes into effect and NPS subscribers make that choice.

A theoretical possibility could be to liquidate all the investments in NPS, transferring the proceeds thereof to the CFI, and start afresh to initiate UPS. There have been some precedents at least among Government Schemes, for example Transfer of Technology Commercialisation program, where DEA ensured return of existing balance including past accretions from implementing agencies to the CFI, before a formal closure of that program.

Any such decision for moving subscribers' funds in NPS though should be tempered with the foreknowledge of extant statutory position of ownership in respect of subscribers' assets in NPS. Section 2(j) of the PFRDA Act in that context reads as follows:

"National Pension System Trust means the Board of Trustees who hold the assets of subscribers for their benefit."

Para 4.6 of the PFRDA (Registration of Pension Funds) Guidelines 2021 similarly says the following:

"The assets and securities shall be held on behalf of and in the name of the NPS Trust.

The Trust shall be the registered owner of these securities and assets. However, individual subscribers under NPS shall remain beneficial owners of these assets and securities."

H: Neutralizing tax consequences in switching subscribers' funds in NPS to UPS from the subscribers' perspective should also remain a relevant point for consideration.

I: The most pressing of the issues from the Fund side at this juncture is 2 fold: one, obtaining clarity on the status and role of intermediaries including the Pension Funds under the new dispensation, and two, a degree of certainty on the quantum of NPS funds due for re-location to UPS (which of course would be known once subscribers exercise their choice). Since an AUM in excess of Rs 8.50 lakh Cr pertaining to subscribers of both Central and State Governments as on 31st march 2024 lies invested in NPS, and time for roll out of UPS is in next 6 months, clarity on policy and implementation mode going forward will help avert converting a planned re-location of funds to a sudden major event for the financial markets.

J: UPS while embracing components of a contributory pension fund in the manner laid out in NPS, and also components of defined benefit pension as guaranteed under OPS does capture and reconcile the most essential parts of both the systems with a fair degree of policy dexterity and financial prudence. The follow-up implementation process on the back of the policy announcement, one expects, should be as robust as the policy announcement.