Nps ppt

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Nps ppt

  1. 1. Presented By Divas Panjwani ,FIII NATIONAL INSURANCE ACADEMY, PUNE
  2. 2. • NPS is intended to resemble the 401k plan offered for employees in the US , but not in totality. NPS follows an EET (exempt-exempt-taxable) structure, similar to its global peer, but the withdrawal amount after the age of 60 can’t remain invested nor can be withdrawn fully. • Another important difference is that premature withdrawal is subject to a few life-changing situations.
  3. 3. • The NPS was introduced by the government last year to give people a way to get a pension during their old age. Employees of the government sector already get a pension, so this scheme was introduced as a social security measure that enables people from the unorganized sector to draw a pension as well. • The working mechanism is quite simple – you contribute a certain sum every month during your working years, which is then invested according to your preference. You can then withdraw the money when you retire, which is currently set at 60 years old. • Investment is according to investor preference, It mean that there are a couple of different options that need to select from. These options pertain to investor’s preference on withdrawal, and asset allocation.
  4. 4. Government of India had initiated Contributory Pension Scheme for the employees' w.e.f 01 Jan 2004. The scheme is applicable for all government employees except the three defense forces. The existing provisions of Defined Benefit Pension and GPF would not be available to new Government servants joining Government service on or after 01 Jan 2004.  The new pension scheme will work on defined contribution basis and will have two tiers, Tier-I and Tier-II. Both tier-I (Pension Account) and Tier II (Savings Account) will be pure retirement savings products, the only distinction being Tier-I is a non with draw able account while Tier-II is a with draw able account to meet financial contingencies. Contribution to Tier-I is mandatory for all Government servants joining Government service on or after 01 Jan 2004, whereas Tier-II will be optional and at the discretion of Government servants. In order to implement the Scheme, there will be a Central Record Keeping Agency and several Pension Fund Managers to offer three categories of Schemes to Government servants, viz. options A, B and C based on the ratio of investment in fixed income instruments and equities. An independent Pension Fund Regulatory and Development Authority (PFRDA) will regulate and develop the pension market.
  5. 5. Tier-I account a) In Tier-I, Government servants will have to make a contribution of 10% of his basic pay (i.e pay in pay band plus grade pay) plus Dearness Allowance, which will be deducted from his salary every month by the Pay and Account Offices (PAO) concerned. An equal contribution will be made by the Government. Tier-I contributions (and the investment returns) will be kept in a non-with drawable Pension Tier-I Account. b) A Government servant can exit at or after the age of 60 years from the Tier-I of the scheme. At exit, it would be mandatory for him to invest 40% of pension wealth to purchase an annuity (from an Insurance Regulatory and Development Authority (IRDA) regulated Life Insurance Company), which will provide pension for the lifetime of the employee and his dependent parents/spouse. In the case of Government servants who leave the Scheme before attaining the age of 60, the mandatory annuitization would be 80% of the pension wealth. Tier-II account. a) No additional Central Record Keeping Agency (CRA) charges will be levied for account opening and annual maintenance in respect of Tier-II. However, Central Record Keeping Agency (CRA) will charge separately for each transaction in Tier II, the charges being identical to the transaction charge structure in Tier- I. b) No limits on number of withdrawals. c) Facility for separate nomination and scheme preference in Tier-II. (d) The subscriber would have the same choice of Pension Fund Managers (PFM) and schemes as in the case of Tier I account in the unorganized sector. (e) Contributions can be made through any Point Of Presence (POP) (f) Facility of one-way transfer of savings form Tier II to Tier-I. (g) Bank details will be mandatory for opening a Tier II account. (h) An active Tier I account will be a pre-requisite for opening of a Tier II account.
  6. 6. Tier 1 Tier 2 Registration Through PoP Through PoP Contribution Minimum Total Contribution of Rs 6000 per annum Minimum Rs 500 per contribution Minimum 4 contributions per year Min Rs 1000 contribution at time of account opening Min Rs 250 per subsequent contributions Min Balance of Rs 2000 at the end of Financial Year (April-March) Schemes Available Active choice ( choose from)-3 Asset Classes (Equity, Corporate Bonds, Government Bonds ) & 6 Pension Fund Managers Auto choice-Asset allocation based on age Active choice ( choose from)-3 Asset Classes (Equity, Corporate Bonds, Government Bonds ) & 6 Pension Fund Managers (see list) Auto choice-Asset allocation based on age Age at Entry Minimum age 18 years and maximum age 55 years Same as Tier I Norms for Withdrawal Can be withdrawn at age 60, 40% of accumulated amount to be used to buy life annuities from an IRDA approved Insurance Company, A phased withdrawal is also allowed but the lump sum balance should be withdrawn before age 70 For exiting before 60 years age, only 20% of the lump sum to be cash withdrawal,80% to be used to buy life annuities from an IRDA approved Insurance Company On death before age 60, the nominee receives lump sum No limits can be withdrawn anytime
  7. 7. There is an Active Choice option, and an Auto Choice option. If you select Auto Choice then your money is invested in a certain percentage in the various classes based on your age. In the Active Choice you can select how much of your money will be invested in the different classes with a cap of 50% in Class E. Now, there are pension funds that will manage money, and in either of these options investor have to select the fund manager who will manage your fund. So even if investor select the Auto Choice, he still have to tell them which fund manager you want to manage your money. Here are the three investment classes: Class Risk Profile Description G Ultra Safe Will only invest in Central and State government bonds. C Safe Fixed income securities of entities other than the government E Medium Investment in equity related products like index funds that replicate the Sensex. However, equity investment will be restricted to 50% of the portfolio.
  8. 8. Who are the Fund Managers ? There will be 6 Fund houses appointed by Government to manage the funds under NPS . You can choose any one of them to be your Fund Managers . They are : 1. SBI Pension Funds Private Limited. 2. UTI Retirement Solutions Limited. 3. ICICI Prudential Pension Funds Management Company Limited. 4. Religare Pension Fund Limited. 5. IDFC Pension Funds Management Company Limited. 6. Kotak Mahindra Pension Fund Limited. Who are Point of Presence ? The following entities have been approved by PFRDA for appointment as Points of Presence (POPs) under the New Pension System for all citizens other than Government employees covered under NPS . 1. Allahabad Bank 2. Axis Bank Ltd 3. Bajaj Allianz General Insurance Co Ltd 4. Central Bank of India 5. Citibank N.A 6. Computer Age Management Services Private Limited 7. ICICI Bank Ltd 8. IDBI Bank Ltd 9. IL&FS Securities Services Ltd 10. Kotak Mahindra Bank Limited 11. LIC of India 12. Oriental Bank of Commerce 13. Reliance Capital Ltd 14. State Bank of Bikaner & Jaipur 15. State Bank of Hyderabad 16. State Bank of India 17. State Bank of Indore 18. State Bank of Mysore 19. State Bank of Patiala 20. State Bank of Travancore 21. The South Indian Bank Ltd 22. Union Bank of India 23. UTI Asset Management Company Ltd
  9. 9. Operational factors Tax saving investment limit under section 80C and 80CCF. Investment under section 80CCD (Investment from the employer required) Tax benefits under Section 80C and 80CCD available only in Tier-I accounts. Taxability factors Change in DTC regime from April, 2012. Benefits to the employers.
  10. 10. Cost factors:  Low commission on the product  Revision of charges in January 2012 Introduction of NPS Lite: To extend the coverage of NPS to the weaker and economically disadvantaged sections of the society with their limited investment potential, PFRDA has launched NPS- Lite which specifically targets the marginal investors and promotes small savings during their productive life. It aims at building up a corpus sufficient enough to buy an annuity for their old age.  Focused  Voluntary  Simple  Safe  Economical  Portable
  11. 11. FACTOR  NPS launched on may 1st 2009 with aim of reaching out to 270 million people, or 90 per cent of the workforce.  But reached to around 2 lac customers out of 2840 lac target customer as per march 2nd 2013. i.e. penetration is 0.070 %. 1. REASON BEHIND LOW PENETRATION IS POOR P. & D. STRATEGY  Due to lack of participation by service providers.  There is no direct incentive for people selling the scheme.  Another major problem with distribution system was reach or approach up to the needy customers. So, in order to increase effectiveness of marketing and distribution particularly the POP performance we can implement two idea: 1. CORDINATION OF NPS-LITE AND OTHER SCHEMES BEING OPERATED IN RURAL AREAS. 2. INCREASING THE INCENTIVES FOR POP’s
  12. 12. FACTOR 2.FLEXIBILITY FACTOR  The NPS is meant for retirement and financial security; it does not permit flexible withdrawals  As a result, individuals will need to use alternate mechanism to fund and protect their protect consumption and other non-retirement needs. 3.COST FACTOR  Allows investment up to 50 percent in equity and rest are divided among government securities.  Risk is also considered to be important determinant of investment.  Ability of NPS to generate adequate replacement rates depend on future returns on assets and portfolio composition
  13. 13. Reasons for failure:  Difficulty to access  Lack of incentives  Lack of participation by the service providers  Low distribution cost to the agents and point of presence  Complications of tier 1 and tier 2 account  Unexpected returns  Low Fund management cost as 90 paisa for Rs 10000 fund management which affects the fund managers operational cost and income
  14. 14. STUDY OF COVERAGE OF NPS  From the beginning, The New Pension System (NPS), aimed at reaching out to 270 million people, or 90 per cent of the workforce.  PFRDA is the regulator for the NPS, established by the Government of india on 23 August 2003 to promote old age income security, took help of POS and 7 associate banks. This distribution system of NPS fetched the figure of sell up to lacs. YEAR NO. OF POLICY HOLDER TARGET RATIO 2009 4,600 270 Million 0.001703704 JUN-2010 6,000 270 Million 0.002222222 MARCH-2011 1,05,000 280 Million 0.0375 JUNE-2012 1,65,000 280 Million 0.058928571 MARCH-2013 2,00,000 280 Million 0.071428571
  15. 15. STUDY OF COVERAGE OF NPS 0 50000 100000 150000 200000 250000 2009 Jun-10 march 2011 june 2012 2nd march 2013 no.of policy holders no.of policy holders
  16. 16. STUDY OF COVERAGE OF NPS  NPS launched on may 1st 2009 with aim of reaching out to 270 million people, or 90 per cent of the workforce.  But reached to around 2 lac customers out of 2840 lac target customer as per march 2nd 2013. i.e. penetration is 0.070 %. REASON BEHIND LOW PENETRATION IS POOR P. & D. STRATEGY  Due to lack of participation by service providers.  There is no direct incentive for people selling the scheme.  Another major problem with distribution system was reach or approach up to the needy customers. So, in order to increase effectiveness of marketing and distribution particularly the POP performance we can implement two idea: 1. CORDINATION OF NPS-LITE AND OTHER SCHEMES BEING OPERATED IN RURAL AREAS. 2. INCREASING THE INCENTIVES FOR POP’s
  17. 17. STRENGTH 1.Low cost plan 2. No restriction on maximum amount of contribution 3. Investment in equity index funds as per the return required by pensioner through active choice fund 4. Investment in government securities for investors with risk averse and capital appreciation approach 5. Tax benefits under 80CCD2 upto 10 percent of basic salary invested in NPS is tax deductible for people who fall in income tax slab of 20 or 30 percent 6. Charges for investment in nps are 0.0084 which is lower than investment in mutual funds and index fund charges 7. The nominee receives entire pension in case of insured's death 8.The NPS give weighted average return of 14.82 percent based on the past data WEAKNESS 1.Tier -1 option doesn't give much flexibility.Its a rigid structure 2.Annuity rates after maturity are not fixed.There isno floor rate so you cannot be sure of the returnsunitl maturity 3.Onlty six fund managers makes it a riskyproposition .If we take into account the working population of india,the number of fund managers is very low 4. In case of withdrawal from the scheme only 20 percent of the accumulated saving is disbursed rest 80 percent is used to buy an annuity plan OPPORTUNITIES Currently there are six fund managers but in order to cater to the needs of massive opulation of India new investment horizons can be created . The investment in new pension schemes will increase the demand of financial struments and will lead to capital market development. The pension fund investment is long term risk adjusted return ,it doesn't involve frequent trading and will not increase the market volatility. The pension fund transfer will increase the demand for fund transfer and will rect invest in banking instrument ,which will encourage banks to open branches in nbanked areas. The major benefit under pension plan will be to the life insurance industry as at ast 40 percent of accumulated pension needs to be invested in life annuity which ads to growth . THREATS 1.The return on the investment depends on the market luctuations and economic conditions there there exist a uncertainity in modest returns. 2.Stiff competition from employee pension scheme,employee provident fund ,Indira Gandhi National Old Age Pension scheme and Public provident fund . 3. The other micropension schemes like SERP ,SEWA are more easily approachable then New Pension Scheme. 4. Fund management cost will increase depending on the pension laibility and the cost involved. NEW PENSION SCHEME
  18. 18. COMPARATIVE ANALYSIS OF NEW PENSION SCHEME WITH OTHER PENSION SCHEMES AVAILABLE IN THE MARKET  New Pension scheme has been facing a great competition with various other government pension schemes(like EPF,PPF) and linked pension schemes(private pension linked products) available in the market.  These government schemes were basically defined benefit schemes where a certain amount of benefit was defined at the beginning while on case of linked and NPS scheme were defined contribution schemes ,where a certain contribution were defined by both employer and employees  The given table shows the various parameters on which the different pension schemes available in market are differentiated. We would analyze each of these factors in detail and account for NPS feasibility among these schemes:
  19. 19. PARAMETER NPS PENSION ULIPS MF PENSION PRODUCTS EPF PPF FUND MANAGEMENT COST(OF TOTAL PREMIUM) 0.25% 1.35% 2.25% NIL NIL LOCK-IN PERIOD 60 years 60 years No lock-in No lock-in 15 years PRE MATURE WITHDRAWAL NOT ALLOWED IN TIER 1 ACCOUNT NOT ALLOWED NO RESTRICTIONS BUT WITH EXIT LOAD ALLOWED FOR SPECIFIC PURPOSE UPTO 50% ON COMPLETION OF 7 YEARS WITHDRAWAL ON MATURITYAND ANNUITY UPTO 60% WITHDRAWAL,ANNUITY FROM REST 33% WITHDRAWAL ANNUITY FROM REST ANNUITY NOT APPLICABLE ANNUITY NOT APPLICABLE ANNUITY NOT APPLICABLE EQUITY EXPOSURE RESTRICTION 50% EXPOSURE NO RESTRICTION NO RESTRICTION NOT ALLOWED NOT ALLOWED TAX IMPLICATIONS(ON CONTRIBUTION) 80C TAX SAVINGS 80C TAX SAVINGS NO TAX SAVINGS 80C TAX SAVINGS 80C TAX SAVINGS TAX IMPLICATIONS(ON MATURITY) WITHDRAWABLE ON MATURITY AND ANNUITY IS TAXABLE 33% LUMP SUM WITHDRAWAL IS TAX FREE,ANNUITY IS TAXABLE LONG TERM CAPITAL GAINS ON EQUITY FUNDS ARE TAX FREE MATURITY AMOUNT IS TAX FREE MATURITY AMOUNT IS TAX FREE TYPE OF PLAN DEFINED CONTRIBUTION DEFINED BENEFIT DEFINED BENEFIT DEFINED BENEFIT DEFINED BENEFIT
  20. 20. FUND MANAGEMENT COST We find that from the above table, FUND MANAGEMENT COST in case of NPS is very less. This makes NPS more profitable to government, employees as well as employer. 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% NPS PENSION ULIPS MF PENSION PRODUCTS EPF PPF SCHEMES FUND MANAGEMENT COST FUND MANAGEMENT COST
  21. 21. LOCK IN PERIOD Lock in period is actually the time frame in which the pensioners are guaranteed for contribution to pension schemes. As we see in the chart the lock in period for NPS and Pension ULIPS is being 60 years, while in case of Mutual fund pension schemes and EPF provides flexibility to the pensioners for anytime withdrawal. 1 : NPS 2:PENSION ULIPS 3: MF PRODUCTS 4: PPF 5: EPF 60 60 0 0 15 0 10 20 30 40 50 60 70 0 1 2 3 4 5 6 LOCK IN PERIOD LOCK IN PERIOD
  22. 22. PRE MATURE WITHDRAWAL: It is the withdrawal of money from the scheme before maturity, such flexibility in pension scheme is not allowed in case of NPS, Pension ULIPS, but however is allowed for MF pension products, EPF and PPF under certain restrictions as mentioned in table. The flexibility provided accounts as a great factor for selection of scheme. The ranking of various schemes on basis of such flexibility accounts as: • EPF • PPF • MF PENSION PRODUCTS • NPS • PENSION ULIPS
  23. 23. WITHDRAWAL ON MATURITY AND ANNUITY: The amount of money that the pensioners would get depend greatly on the withdrawal amount that they will get on maturity and also on the annuity payments received from the annuity bought from any life insurance companies. This flexibility is provided only in present schemes which was not in older government schemes like EPF,PPF etc. 60% 33% 100% 100% 100% 67% 0% 10% 20% 30% 40% 50% 60% 70% 80% 0% 20% 40% 60% 80% 100% 120% NPS PENSION ULIPS MF PENSION SCHEMES EPF PPF MATURITY ANNUITY
  24. 24. EQUITY EXPOSURE Some amount of contribution received from the pensioners are invested in equity markets which fetch higher returns. NPS scheme has certain restrictions in it as of 50% of the amount of contribution can be invested in equity market, while no such restrictions are there in other old pension schemes. This amounts for the flexibility in scheme for the returns depending on market conditions, which is not much in case of NPS.The schemes could be ranked on this parameter as:  EPF  PPF  PENSION ULIPS  MF PENSION PLANS  NPS
  25. 25. TAX IMPLICATION ON CONTRIBUTION AND MATURITY: In case of contribution the tax savings are provided in case of NPS as with other old pension schemes like EPF,PPFas of under section 80c of income tax act, which allows to help in your tax income deductions, while no such tax savings are allowed for MF pension plans. Similar is in case of maturity the section 80c helps in providing tax savings by reducing your maturity amount by the certain taxable income, However in case of NPS the withdrawal amount as well as the annuity is taxable. In case of pension ULIPS 33% lump sum withdrawal is tax free, annuity is taxable. In case of MF pension plans long term capital gains on equity funds are tax free, however the withdrawal amount is taxable. However other government schemes like EPF ,PPF the maturity amount is tax free. Ranking of various scheme on such parameter is as: • EPF • PPF • PENSION ULIPS • NPS • MF PENSION PLANS
  26. 26. Reasons for failure:  Difficulty to access  Lack of incentives  Lack of participation by the service providers  Low distribution cost to the agents and point of presence  Complications of tier 1 and tier 2 account  Unexpected returns  Low Fund management cost as 90 paisa for Rs 10000 fund management which affects the fund managers operational cost and income
  27. 27. DEMAND OF PENSION IN INDIA Demographics Year Median Age in years 2010 25 2020 29.5 2030 33.2 2040 35.4 2050 38.4 0 10 20 30 40 50 60 70 0 50 100 150 200 250 300 350 Year 2020 Year 2030 Year 2050 Projected increase in percentage and numbers of Grain population Number of eldery people Percentage growth On the basis of the above data it can be inferred with the development in innovation and technology has lead to increase in longevity of the population due to which average life expectancy has risen by approximately 15 percent for females and 14 percent for males. Therefore, increase in life expectancy will require to fulfill the basic needs in the old age which will lead to great demand of pension schemes in India. Therefore, with the improvement in cost factors such as management expense and easy availability will lead to success of the New Pension scheme
  28. 28. DEMAND OF PENSION INDIA (CONT.) 85% 15% Work force Distribution Earners Unpaid Family workers Informal Sector 78% Formal Sector 22% Earners Distribution Labor Market Status, Income and Savings Capacities About 85 percent (363 million) of the total workforce comprising 425 million persons receive earnings while the other 15 percent or 62 million are unpaid family workers. As shown in Figure, the 363 million earners are divided into 284 million informal sector workers and 79 million formal sector workers. The data has been illustrated in the pie chart showing distribution of work force . The formal sector consists of 53 million earners, who belong to the target group of the EPFO, and 26 million workers in small firms, who are excluded from EPFO coverage. Source :PFRDA (2009): NPS Handbook. pfrda.org.in/writereaddata/linkimages/Manual%20Part_49990268420.pdf
  29. 29. Current Scenario (Today’s Times of India )
  30. 30. Conclusion Combining various pension schemes on various parameters we find that NPS was a good choice for pensioners but what not worked out were the various factors we have seen earlier that accounted for the failure of NPS. However if implement these factors were implemented accordingly as per other government schemes, the scheme would be a success. SUGGESTIONS The success of the NPS scheme depends on the following parameters The management of fund by pension fund managers Increasing the incentives to the point of presence (distributions channel ) Double digit return expected in range of 10.51 to 12.78 which is accrued by investing in the different class of securities  Distribution through micro channel

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