Question

Many companies are moving away from traditional pension plans and shifting the investment risk to employees by offering them contribution plans.

1.) Is this a good idea for society, employers/ employees?

2.) Also, do you think employers or employees" should primary responsibility for providing retirement income?

Answer 1

In family pension system employer i.e. government pays to pensioner 50% of basic salary at the time of retirement and DA to take care of inflation. After the death of employee his wife or dependent like un employed son below the age of 21 years , unmarried and financially dependent daughter, dependent parents, unmarried or widowed dependent sisters can get 60% of basic pension i.e. basic pay of employee * 50%* 60%. If no dependent , pension is stopped.

From 2004 onwards govt is providing pension under national pension scheme. In earlier system of pension, the pension out go is uncertain and increasing day after day and becoming difficult for planning and budgeting. That is why NPS is introduced.

In NPS the out go kn the employee (CTC) is known before hand and differred payment pension cost is provisioned in the same month of salary payment.

Every month govt pays 14% of basic pay as employer contribution and deducts min. 12% of basic pay as employee contribution. These amounts will be invested by pension funds. At present pension funds like UTI, ICICI HDFC etc are available. Employee can choose any fund and also can shift one to other. They invest as per age of employee and risk appetute and apportions to FDs, bonds, call money , equities etc. With max 40% and min 0% in equity as choosen by employee. All the pension funds are regulated by Pension regulatory authority.

After the person retires he can withdraw max of 40% accumulated amount and balance will be invested in annuity schemes. They will pay the monthly pension to retired employee. In the event of death of retired employee his nominee (irrespective of income status) will get back the balance proceeds of pension annuities. Since start of NPS the annual rate of return is 14 to 9 percent till date. With 26% of basic for min 30 years of service invested in systamatic invest plan will acrue quite good amount.

In rising economies like india where the stock markets are on rising graph, the returns will be more with NPS than family pension. In unfortunate case of employee and dependents dying after very short period of retirement his heirs will not get any thing in old pension.

In nutshell pension amount as per old pension scheme is defined and pension in NPS is market and economy driven and depends on rate of interest, yield on bonds and return on shares.. So in progressive countries NPS is advantageous to both employee and employer.