CPF Vs New pension Scheme

Please the read the earlier parts for continuity.

The new pension scheme is similar to CPF scheme and it allowed contribution to the tune of minimum of 10 % of their basic pay and DP and maximum of his total basic pay and DP. The Govt matching contribution will be 10 % of the basic and DP only. The other aspect is the employees are entitled to withdraw his contribution as he liked on the prescribed conditions. The Govt contribution of 10 % was maintained separately which is not withdrawable and the accumulation along with the interest is paid to the employee at the time of retirement along with his savings. This system I feel deprived the employees the compounding effect and employees were withdrawing their savings fully leaving nothing at the end except the Govt contribution.

The advantage of New Pension Scheme is that the employee contribution of 10 % minimum is kept separate in tier 1 account and is non-withdrawable along with the Govt contribution. The withdrawable part is separated in to Tier ll account. This system leads to compulsory savings of 20 % (10 % contributed by the employee + 10 % by means of Govt contribution) of one's salary which is good for employees at the end and they get the benefit to the maximum.

The other advantage is of new pension scheme is that the Dearness allowance (DA ) is also added to the kitty and it consists of Basic Pay + DP + Dearness Allowance. This is the extra benefit to the new comers and they get extra contribution of prevalent DA to their savings from the Govt.

The following illustration provides the rough estimation of benefit one will be getting at the end of service. We will take the case of new recruit engineer aged around 23 years contributing 10 % from his side (Basic + DP +DA) and the matching contribution from the Govt side. We will assume the same logic of 10 % hike in his salary every year (This 10 % salary increase is estimated based on the previous pay commission's pay scale and dealt in earlier articles)

The annual contribution at the first year of his service will be ( 10% of his salary Rs 1692 + matching contribution from Govt Rs. 1692 = Rs. 3384 * 12 = Rs. 40608 ) and is increased by 10 % every year till his retirement. The employee also does not feel burdened by setting aside a sum of Rs. 1692 every month from his side and in the long run it will benefit him a lot.

years	contribution	cum . Contribution	Interest @ 10%	total
1	40608	40608	4061	44669
2	44669	89338	8934	98271
3	49136	147407	14741	162148
4	54049	216197	21620	237817
5	59454	297271	29727	326998
6	65400	392398	39240	431637
7	71940	503577	50358	553935
8	79134	633068	63307	696375
9	87047	783422	78342	861764
10	95752	957515	95752	1053267
11	105327	1158594	115859	1274453
12	115859	1390312	139031	1529344
13	127445	1656789	165679	1822468
14	140190	1962658	196266	2158923
15	154209	2313132	231313	2544445
16	169630	2714075	271408	2985483
17	186593	3172075	317208	3489283
18	205252	3694535	369453	4063988
19	225777	4289765	428977	4718742
20	248355	4967097	496710	5463806
21	273190	5736997	573700	6310696
22	300509	6611206	661121	7272326
23	330560	7602887	760289	8363175
24	363616	8726792	872679	9599471
25	399978	9999449	999945	10999393
26	439976	11439369	1143937	12583306
27	483973	13067279	1306728	14374007
28	532371	14906378	1490638	16397016
29	585608	16982624	1698262	18680886
30	644168	19325054	1932505	21257560
31	708585	21966145	2196615	24162760
32	779444	24942204	2494220	27436424
33	857388	28293812	2829381	31123193
34	943127	32066320	3206632	35272952
35	1037440	36310392	3631039	39941431
36	1141184	41082615	4108262	45190877
37	1255302	46446179	4644618	51090797

 

The retiring corpus at the interest of 10% is around Rs 5.00 crores and he can buy annuity from that corpus.

In the similar way the return at the interest of 6 % will be

 

years	contribution	cum . Contribution	interest	total
1	20280	20280	1217	21497
2	22308	43805	2628	46433
3	24539	70972	4258	75230
4	26993	102223	6133	108356
5	29692	138048	8283	146331
6	32661	178992	10740	189732
7	35927	225659	13540	239199
8	39520	278719	16723	295442
9	43472	338914	20335	359248
10	47819	407068	24424	431492
11	52601	484093	29046	513138
12	57861	571000	34260	605260
13	63647	668907	40134	709041
14	70012	779053	46743	825797
15	77013	902810	54169	956978
16	84715	1041693	62502	1104195
17	93186	1197381	71843	1269223
18	102505	1371728	82304	1454032
19	112755	1566787	94007	1660794
20	124031	1784825	107089	1891914
21	136434	2028348	121701	2150049
22	150077	2300126	138008	2438133
23	165085	2603218	156193	2759411
24	181593	2941005	176460	3117465
25	199753	3317217	199033	3516251
26	219728	3735978	224159	3960137
27	241701	4201838	252110	4453948
28	265871	4719819	283189	5003008
29	292458	5295465	317728	5613193
30	321704	5934897	356094	6290991
31	353874	6644865	398692	7043556
32	389261	7432818	445969	7878787
33	428187	8306974	498418	8805393
34	471006	9276399	556584	9832983
35	518107	10351089	621065	10972155
36	569917	11542072	692524	12234597
37	626909	12861506	771690	13633196

 

The return generated will be Rs 1.36 crores at 6 % of interest.

The illustration of 6 and 10 was taken as is done in other ULIP Schemes as per the IRDA guidelines. The calculation is done approximately and not taken into account the premium allocation and other charges which will be charged by PFRDA. The employee can choose the option as per his risk profile and return will vary accordingly.

Thus the new pension scheme is able to give better return than the CPF scheme because of inclusion of DA and non-withdrawable nature.

ULIP Vs New pension plan

Please read the earlier articles for continuity.

The PFRDA (Pension Fund Regulatory and Development Authority) bill is still pending in the parliament and only after the parliament approval the things will look clear. Even the PFRDA stated that other investment option mainly the equity investment will be available only after the parliamentary approval.

The New pension plan offered to Govt is similar to what is offered by the Insurance companies under ULIP Plans. The difference is that the private sector employee has to opt for a plan available with any of the insurance companies. The disadvantage in that case and the truth is that many of the well paid employees does not even think about retirement and they have the tendency to overlook this aspect. They realize the importance of the pension only at the last stage and the premium outgo at later part of the life is huge and they lose the time and the compounding benefit. To some extent these disadvantage is mitigated in the new pension scheme and it is made compulsory on the new recruits to Govt now and knowingly or unknowingly they start contributing towards pension.

The scheme of working of new pension plan and the charges like premium allocation charges, fund management charges, policy administration charges, the mortality charges etc not known now. Normally in the ULIP plans these charges are very high and they are collected within 05 -10 years of the plan though pension plans normally continue for 25 – 30 years. This is a great disadvantage to the employees since now the best performing fund may turn worst performer after some years and by collecting their premium well in advance the people are forced to continue in the scheme.(The details of pension plan are covered in earlier articles)

Since PFRDA invited bid for fund management, the insurance companies are forced quote at lower rates to bag the lucrative big money the charges collected by these companies will be hopefully lower than what is charged in the market. Further the Govt employee does not choose any specific AMC for his investment and the risk could be lower since his investment is diversified in many AMC's selected by PFRDA. The clear cut picture will emerge only after the bill is passed in parliament and all the options of A , B & C is allowed to employees and the charges are made known.

Blog turns 25

This blog was mainly created for the Govt servants especially in R & D organization to make informed decisions in their walks of life since there are plenty of opportunities knocking outside and offers are luring. Hence it is important that one is taking the decision correctly after taking in to fact all the factors. This blog was discussing various aspects of Govt job and will be continuing in that direction so that they are taking informed and rational decisions.

I hope this blog will be useful to readers and request to go through the earlier articles for better understanding. Further I also request your feedback on the articles which will enable better discussion, discovery ultimately the decision. The blog title was chosen accordingly and hope this blog will benefit all the Govt servant.

Part ll New Pension Scheme

Please read the first part for continuity.

We saw in the earlier articles about the new pension scheme introduced by Govt to its employees from 01.01.2004. This type of scheme may be new to pure govt departmental employees but certainly not new to R & D institutions like CSIR (Council of Scientific and Industrial Research) etc. wherein the scientific staffs were earlier recruited under non –pensionable scheme called CPF (Contributory Provident Fund) and later were given option to convert to GPF and the pension scheme.
This CPF scheme is applicable to all Govt institutions which are not governed under pensionable scheme prior to 31.12.2003. This CPF SCHEME is in existence in many R& D institutions which were started newly for the last 20 years or so and the govt does not provide pension benefit to these organization and instead gone for the CPF scheme wherein it does not pay pension.
CPF scheme envisages a matching contribution from the govt subject to a maximum of 10 % of his emoluments (basic + DP) in line with the contribution made by the Govt servant in the fund. Hence Govt already started moving away from defined pension to contributory pension. The only difference is that the interest is paid to the Govt servant under CPF is as per the interest fixed by Govt for other Provident fund on yearly basis and is credited to individual’s account by the end of financial year.
Coming back to the new pension scheme, the return is based on the market forces and the Govt servant will be given option to opt for three categories of schemes , option A,B,C etc based on the ratio of investment in fixed income instruments to pure equity. The employees are free to opt for the categories which consists of pure equities, combination of equity and fixed income instruments like bond etc or pure fixed income instruments. The employee can choose the scheme as per his risk profile and the return also varies from scheme to scheme. This scheme provide a central record keeping agency for keeping the records and several fund managers to manage the fund.
The PFRDA (Pension Fund Regulatory and Development Authority) has been constituted by the central Govt and they have entered in to agreement with NSDL (National Securities Depositories Ltd ) for keeping records as a central record keeping authority and also will be providing the annual statements etc to the employees. Recently the PFRDA has appointed the Govt run fund houses like SBI, UTI Mutual fund and LIC to manage the fund based on competitive fund management charges. The record keeping charges are borne by the Govt which is a welcome step since in other cases like demat account etc the annual charges are collected from the clients.
As per PFRDA , now these fund managers will offer the employees investment option in the fixed income Govt securities only which gives assured returns and other categories will be made available later.

Continued in part lll