Pradeep Document

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Legal & Regulatory Framework in

Pensions Sector

Invest India Economic Foundation

New Delhi, May 20, 2004

Hemant Sahai Associates

Advocates

New Delhi Mumbai Bangalore Goa

Hemant Sahai AssociatesAdvocates


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Legal & Regulatory Framework in

Pensions Sector

Legal Regime governing the Pensions Sector: Pensions Act, 1871 (23 of 1871),

Employees Provident Funds and Miscellaneous ProvisionsAct, 1952

The Employees Provident Funds Scheme, 1952

The Employees Deposit-linked Insurance Scheme, 1976

The Employees Pension Scheme,1995

The Payment of Gratuity Act, 1972 Government Related :

The terms and conditions of service of Government Servants,

Government Pension Rules, 1972 ,

Government GPF Rules 1960,

Insurance Act, 1938 (Annuities on Life)Hemant Sahai Associates

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Pensions Act, 1871

Scope of the Pensions Act T

o consolidate and amend laws relating to pensionsand grants by government of money or land revenue

Put structure in place that distribution of pensionshould essentially be in hands of executive governmentwithout intervention of civil courts

Jurisdiction of civil courts ousted except to limitedextent upon receipt of certificate from Collector

Provides for commutation of pensions

Pensions exempt from attachment



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Employees Provident Funds and

Miscellaneous Provisions Act, 1952

APPLICABILITY OF ACT

To Any Establishment which is a factory engaged in any industryspecified in Schedule I and employing 20 or more persons.

Any other establishment or class of establishment employing 20or more persons, as may be notified by the Central Government.

SCHEMES

Employees Provident Funds Scheme,1952 sec 5

Employees Pension Scheme,1995 sec 6A

Employees Deposit-Linked Insurance Scheme,1976 sec 6C REGULATORY MECHANISM

Central Board - section 5A

Executive Committee section 5AA

State Board - section 5B

Central GovernmentHemant Sahai Associates

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The Schemes-EPF Act- contd..Employees Provident Fund Scheme,1952

Fund Created under Sec 5 and vested in and

administered by the Board created under sec 5A Contributions to the Fund Clause 29 :

By Employer - 10% of basic, DA and Retention Allowance 12% in respect of establishments/class specified by CG

Matching contribution by employee

Scheme Applicable to : All factories and other establishments to which Act applies or is

applied does not apply to Tea Factories in Assam

All employees drawing pay upto Rs 6,500 per month



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The Schemes-EPF Act- contd..

Employees Provident Fund Scheme,1952

Corpus of the Fund under the Scheme to be

deposited with RBI, SBI or any other approvedscheduled bank clause 48, 52

Corpus to be invested as per direction of CG, insecurities referred to in Section 20 of Indian

Trusts Act clause 52 Fund cannot be expended for any purpose other

than to credit of individual members



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The Schemes-EPF Act- contd..Employees Pension Scheme,1995

Pension Fund Created under Sec 6A and vested in and

administered by the Board created under sec 5A Contributions to the Pension Fund Clause 3:

By Employee 8.33% of basic, DA and Retention Allowance This is a part of the contribution made to the Fund under the EPFScheme

By CG 1.16% o the pay Scheme Applicable to :

All employees of factories and other establishments to which Actapplies or is applied in terms thereof



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The Schemes- EPF Act

Employees Pension Scheme,1995

Scheme to provide for : Replaces Family Pension Scheme which merges with this

scheme

Superannuation pension, retiring pension, disablement

Widow/widower, children or orphan pension

Corpus of the Pension Fund, except the CGcontribution shall be invested as per directions ofCG in securities referred to in Section 20 of IndianTrusts Act clause 26



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The Schemes- EPF Act

Employees Pension Scheme,1995

Pension Fund cannot be expended for anypurpose other than payments envisaged in thescheme, i.e. payment of family pension, lifeassurance benefit and retirement cum withdrawalbenefits clause 27



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The Schemes-EPF Act- contd..Employees Deposit Linked Insurance Scheme,1976.

Deposit Linked Insurance Fund Created under Sec 6C

and vested in and administered by the Board createdunder sec 5A

Contributions to the Insurance Fund :

By Employer 1% of aggregate of basic, DA and RetentionAllowance - Sec 6C(2)

Upto 0.25% to meet expenses etc. - Sec 6C(4)(a) Scheme Applicable to :

All employees of establishments to which the Act applies



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The Schemes EPF Act- contd..

Employees Deposit Linked Insurance Scheme,1976.

To provide life insurance benefits

Investment of funds in the Insurance Fund :

Funds contributed into the Insurance Fund upto 31.3.1997 to bedeposited with CG and shall fetch statutory interest @8.5% perannum.

From 1.4.1997- Corpus of the Fund under the scheme to be

deposited with RBI,SBI or any other approved scheduled bankand invested as per direction of CG in securities referred to inSection 20 of Indian Trusts Act

Insurance Fund cannot be expended for any purposeother than payment of benefits under the scheme clause

17(1) Hemant Sahai AssociatesAdvocates


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Regulatory Mechanism EPF ACT

Central Board

Constituted by notification by CG sec 5A

Trustees appointed for a period of 5 years To administer the Funds in respect of the Schemes provided

by the Act and to effectuate the provisions of the scheme

Appoint Central Provident Fund Commissioner to act as theCEO of the Board

Composition Chairman & Vice Chairman

Not more than 5 persons from the CG officials

Not more than 15 persons representing state government

10 persons representing the employers of theestablishments to which the respective schemes apply

10 persons among employees Hemant Sahai AssociatesAdvocates


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Regulatory Mechanism EPF ACT

The Central Board to act through its functionaries such as the

the Executive Committee, Central Provident FundCommissioner (CEO of the Board), Regional Commissioner.

Powers of Central Government

Till the time the Board is constituted the CG shall administer heFund and may exercise any of the powers and discharge the

functions of the Board Power to give directions

Power to make rules

Power to remove difficulties



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Adjudications EPF ACT

Appeal to Tribunal

Any person aggrieved by a notification of the CG or by anyorder of the CG or any authority (Commissioner) under the Act,can prefer an appeal to a Tribunal

Penalties & Prosecution Under the Provident Funds Scheme & the deposit linked insurance

scheme any person who avoids making any payment shall be punishedwith an imprisonment for a term that may extend to one year and a fine

of Rs. 4000.

Under the Employees Pension Scheme any person who is guilty ofcontravention of or non-compliance of any provision/requirement of thescheme shall be punishable with imprisonment that may extend to oneyear and with fine that may extend to Rs. 5000/



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The Payment of Gratuity Act, 1972

Object: Provides for a scheme for the payment of gratuityto employees engaged in factories, mines, oilfields,

plantations, ports, railway companies, shops or other establishments.

Authority: Different controlling authorities to beappointed by appropriate government for different states forthe administration of this act.

Gratuity Fund: Employer to maintain a gratuity fund orshall obtain a insurance from the Life Insurance Corporationof India for his liability for payment towards the gratuityunder this Act.



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The Payment of Gratuity Act, 1972

Payment: Gratuity payable to employee on termination of his employment

after rendering continuous service for at least five years.

Gratuity payable on employees superannuation, retirement or

resignation, death or disablement due to accident or disease.

Penalty: Any employer who contravenes or makes default

in complying with any of the provisions of this act shall bepunishable with imprisonment for a term not less than three

months and can extend to one year, or with a fine not less

than Rs 10,000 extending upto Rs 20,000 or both.



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Government Pension Rules,

1972

The Government employees receive a non-

contributory, indexed, defined benefit pension,

funded entirely by the State.

The Government employees contribute 6% of

wages into a provident fund scheme, maintainedby the appropriate government.


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I

nsurance Act, 1938

Definition of Life Insurance Business

Sec 2(11) : life insurance business means the business of effecting

contracts off insurance upon human life, including any contract wherebythe payment of money is assured on death (except death by accidentonly) or the happening o any contingency dependent on human life, andany contract which is subject to payment of premiums for a termdependent on human life and shall be deemed to include-

The granting of disability and double or triple indemnity accidentbenefits, if so provided in the contract of insurance;

The granting of annuities upon human life; and

The granting of superannuation allowances and annuities payable outof any fund applicable solely to the relief and maintenance of personsengaged or who have been engaged in any particular profession, trade

or employment or of the dependents of such persons.


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Public Provident Fund Act, 1968:

Provides for Public Provident Fund Scheme that establishes a

provident fund for the general public to make contributions to the

fund and obtain income tax rebate. Minimum investment Rs 500 maximum 70,000 per annum.

Withdrawals- Only one withdrawal allowed during any one year

from sixth year. Withdrawal limited to 50% of the balance at the

credit at the end of 4th year preceding the year in which the amount

is withdrawn or the end of the preceding year whichever is lower. The account extended beyond 15 years; partial withdrawal allowed

up to 60% of the balance to the credit at the commencement of the

extended period.


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New Pension Scheme

The New Scheme has been implemented effective from January 1, 2004 i.e. the New Scheme shall apply to specified new government servantscommissioned into Government service after this date

Contours of this New Scheme as notified by CG :

based on defined contributions,

will use the existing network of bank branches and post offices etc. tocollect contributions and interact with participants allowing transfer of thebenefits in case of change of employment and offer a basket of pensionchoices,

mandatory for new recruits to the central Government service except thearmed forces. The existing provisions of defined benefit pension and GPFwould not be available to the new recruits in the central Governmentservice.

monthly contribution would be 10 percent of the salary and DA to be paidby the employee and matched by the Central Government.


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New Pension Scheme

no contribution from the Government in respect of individuals whoare not Government employees.

contributions and investment returns to be deposited in a non-withdrawable pension tier-I account.

In addition to the above pension account, each individual may alsohave a voluntary tier-II withdrawable account at his option.

This option is given as GPF is proposed to be withdrawn for newrecruits in Central Government service. Government will make no

contribution into this account. These assets would be managedthrough exactly the above procedures. However, he would be free towithdraw part or all of the second tier of his money anytime. Thiswithdrawable account does not constitute pension investment, andwould attract no special tax treatment.


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New Pension Scheme

Individuals can normally exit at or after age 60 years for tier I of thepension system. At exit the individual would be mandatorily required toinvest 40 percent of pension wealth to purchase an annuity (from an IRDA-

regulated life insurance company). In case of Government employees the annuity should provide for pension

for the lifetime of the employee and his dependent parents and his spouse atthe time of retirement. The individual would receive a lump-sum of theremaining pension wealth, which he would be free to utilise in any manner.Individuals would have the flexibility to leave the pension system prior toage 60. However, in this case, the mandatory annuitisation would be 80% ofthe pension wealth.

a central record keeping and accounting (CRA) infrastructure, severalpension fund managers (PFMs) to offer three categories of schemes viz.option A, B and C.


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New Pension Scheme

The participating entities (PFMs and CRA) would give out easilyunderstood information about past performance, so that the individual wouldbe able to make informed choices about which scheme to choose.

An independent pension fund regulatory and development authority(PFRDA) will regulate and develop the pension market. PFRDA willdevelop its own funding stream based on user charges.

Till such time when a statutory PFRDA is established, an interim PFRDA,on the pattern of SEBI and IRDA, should be appointed by an executiveorder.

Pension contributions and accumulation would be accorded tax preferenceupto a certain limit, but benefits would be taxed as normal income

The option of joining the new system would also be available to the StateGovernments and as and when they decide, the new system would becapable of accommodating the new participants.


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New Pension Scheme

Mandatory programmes under the Employee Provident Fund

Organisation (EPFO) and other special provident funds

would continue to operate as per the existing system.However, individuals under these programs could

voluntarily choose to additionally participate in this scheme.


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Pension Sector Way Forward

Enact THE PENSIONS (REGULATION ANDDEVELOPMENT) ACT

This is not merely a Pensions Fund Regulator but aregulator for the entire pensions sector in India

Clear distinction between policy and implementation Policy is exclusive prerogative of CG and Regulationand implementation is exclusive prerogative of

regulator Regulator will issue licenses for PFMs, CRA and such other

intermediaries as may be deemed necessary

Regulator to have penal powers

Regulated AssetsHemant Sahai Associates

Advocates

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