Employee pensions in India Current practices, challenges and prospects December 2015 KPMG.com/in © 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Table of contents Introduction An overview of employer pension plans in India Comparative analysis of EPF, NPS and SAF Factors impacting growth of employee pensions in India An international perspective on pension practices Survey results – KPMG in India’s Employer pension plans survey, 2015 Industry voices Conclusion © 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Introduction The increasing life expectancy coupled with the gradual disappearance of the extended family system, makes it imperative for India to design a robust pension system to avoid impoverishment in old-age and accompanying social distress. The current scenario in India is marked by low and insufficient pension coverage. Timely and smart policy interventions, when a majority of the Indian population is still young, can help avert an impending pension crisis. It is important for all the key stakeholders such as the government, regulators, employees and employers to engage in a focused and constructive discussion to explore new ways to broaden and deepen pension coverage in India. Careful and nuanced interventions are required in the tax regime for pension benefits in India, to help reduce the administrative burden on employers and enhance additional pension savings. The pension system in India should encourage sufficient pension contributions during employees’ earning lifespan to finance a reasonable standard of living after their retirement. A well-designed pension system is one which is economically and financially sustainable, while providing for a meaningful retirement income to the beneficiaries. It also accumulates long-term savings that aid investments in infrastructure. Since pension plans are very long-term plans, small changes in contributions and investment returns can make a big difference in the terminal corpus, owing to the power of compounding. FICCI and KPMG in India have collaborated on this white paper on the current practices, challenges in employee pensions in India. We sincerely hope that this report will facilitate and strengthen a progressive debate on building a comprehensive and sustainable pension regime in India. Parizad Sirwalla Dr. A Didar Singh Partner and Head Secretary General Global Mobility Services, Tax FICCI KPMG in India © 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 Employee pensions in India An overview of employer related pension plans in India The Indian pension regime for the employed population presently National Pension System1 has mandatory, quasi-mandatory and voluntary plans. Over The National Pension System (NPS) is an initiative by the the past decade, significant changes have occurred on the Government of India to enable individuals to make investment pension landscape in India. A synopsis of the various employer- decisions regarding their future and provide for their retirement dependent pension plans is given below: through systematic savings. Employees’ Provident Fund regime NPS became operational on 1 January 2004 and was made The Employees’ Provident Funds and Miscellaneous Provisions applicable to all new employees of the central government, Act, 1952 (EPF Act) is the predominant social security legislation except the armed forces. The Pension Fund Regulatory and in India aimed at, inter alia, securing retirement benefits for Development Authority (PFRDA), with effect from 1 May 2009, employees. Currently, three schemes operate under the EPF Act: made NPS available to all citizens of India, on a voluntary basis. Employees’ Provident Fund Scheme (EPFS), Employees’ Pension NPS is a defined contribution scheme wherein the final corpus Scheme (EPS) and Employees’ Deposit Linked Insurance depends upon the contribution made by subscribers and the Scheme (EDLIS). investment returns. Application of the EPF Act to organisations In December 2011, the PFRDA introduced a corporate sector Broadly speaking, the EPF Act applies to the following entities: model to provide NPS to employees of corporate entities of the private and public sector enterprises. This will help the employed • Every establishment which is a factory engaged in any population in the corporate sector to avail the NPS facility industry specified by the central government and in which 20 through their employers. or more persons are employed; • Any other establishment employing 20 or more persons which Superannuation Funds the central government may, by notification, specify in this Superannuation Fund (SAF) is an employer-sponsored voluntary behalf. pension plan to facilitate pensions for employees when they retire/leave the organisation. SAF can be either a defined Voluntary coverage contribution or a defined benefit scheme, depending upon the Any establishment employing less than 20 persons can be option selected by the employer. covered voluntarily. An employer may create a SAF through a Trust, by executing However, not all employees in an establishment covered under a Trust Deed and have the same approved by the income-tax the EPF Act, are required to be enrolled for contributions. Some authorities. The Superannuation trust funds could be managed of the employees can be excluded from participation under the internally or through an insurance service provider which EPF Act, as explained below. is approved by the Insurance Regulatory and Development Excluded employees Authority. An employee whose salary is greater than INR15,000 per month During our research, we discovered that data on the number and who is not currently a member of the EPF scheme may of SAFs in India is not consolidated; accordingly, the number be excluded from the provisions of the EPF Act. This clause of of participants and the total corpus was unavailable. Since salary-based exclusion does not apply to International Workers there is no independent regulator of SAFs in India and due to and employees working in newspaper establishments. insufficient data, it becomes difficult to establish the coverage and effectiveness of this pension instrument. 1. www.pfrda.org.in, as accessed in November 2015 © 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Employee pensions in India 2 Comparative analysis of EPF, NPS and SAF Features Employees’ Provident Fund (EPF) National Pension System (NPS) Superannuation Fund (SAF) Membership In EPF-covered establishments, employees with monthly Any person who is a citizen of India, The SAF Trust, through its trust deed salary of up to INR 15,000 are required to become whether resident or non-resident, and rules, prescribes the eligibility members. However, the salary cap does not apply to aged 18 to 60 years can become a criteria of membership for employees. International Workers and employees of newspaper member of NPS. establishments. Contribution In general, contribution rates are 12 per cent of salary Contribution rates are flexible in NPS. Contribution rates are flexible in SAF. rates (defined as per the EPF Act), by the employer and As per the Income-tax Rules, 1962 employee. the total employer contributions towards any provident fund and SAF should not exceed 27 per cent of the employee’s salary. Benefits • Lump sum withdrawal at resignation, retirement or • Partial lump sum or phased • Partial lump sum withdrawal death. Partial withdrawal for specific purposes such as withdrawal • Annuity house construction, higher education, marriage etc. • Annuity • Monthly member pension at retirement or permanent disability. • Survivors’ pension and assurance benefit on death of employee. Investment The accumulations are invested by the board of trustees of Subscribers may choose their own The trustees of SAF invest the EPF, as per the norms laid down by Ministry of Labour and investments from three asset classes funds as per the norms laid down by Employment, Government of India. i.e. corporate bonds, government Ministry of Finance, Government of securities and equity. The investment India. in equity is capped at 50 per cent. Tax benefits Employee contribution is eligible for deduction from Employee contribution up to 10 per Employee contribution is eligible for (On employees’ taxable income up to INR 150,000*. cent of defined salary is eligible for deduction from employees’ taxable contributions) Employer contribution up to 12 per cent of defined salary deduction from employees’ taxable income up to INR 150,000*. not included in employees’ taxable income. income subject to a cap of INR Employer contribution up to INR 150,000*. 100,000 per annum not included in An additional deduction of INR employees’ taxable income.