Employee Law

Legal & Regulatory Framework in Pensions Sector

Invest India Economic FoundationNew Delhi, May 20, 2004

Hemant Sahai AssociatesAdvocates

New Delhi • Mumbai • Bangalore • Goa

Hemant Sahai Associates

Advocates

Legal & Regulatory Framework in Pensions Sector

Legal Regime governing the Pensions Sector: Pensions Act, 1871 (23 of 1871), Employees Provident Funds and Miscellaneous Provisions Act, 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)


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Pensions Act, 1871

Scope of the Pensions Act To consolidate and amend laws relating to pensions

and grants by government of money or land revenue Put structure in place that distribution of pension

should essentially be in hands of executive government without intervention of civil courts

Jurisdiction of civil courts ousted except to limited extent – 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 industry

specified in Schedule I and employing 20 or more persons. Any other establishment or class of establishment employing 20 or 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 Government


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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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Employees Provident Fund Scheme,1952 Corpus of the Fund under the Scheme to be

deposited with RBI, SBI or any other approved scheduled bank – clause 48, 52

Corpus to be invested as per direction of CG, in securities 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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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 EPF Scheme

By CG – 1.16% o the pay Scheme Applicable to :

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


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The Schemes- EPF Act

Employees Pension Scheme,1995Scheme 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 CG contribution shall be invested as per directions of CG in securities referred to in Section 20 of Indian Trusts Act – clause 26


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The Schemes- EPF Act

Employees Pension Scheme,1995 Pension Fund cannot be expended for any

purpose other than payments envisaged in the scheme, i.e. payment of family pension, life assurance benefit and retirement cum withdrawal benefits – clause 27


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Employees Deposit Linked Insurance Scheme,1976. Deposit Linked Insurance Fund – Created under Sec 6C

and vested in and administered by the Board created under sec 5A

Contributions to the Insurance Fund : By Employer – 1% of aggregate of basic, DA and Retention

Allowance - 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 be deposited with CG and shall fetch statutory interest @8.5% per annum.

From 1.4.1997- Corpus of the Fund under the scheme to be deposited with RBI,SBI or any other approved scheduled bank and invested as per direction of CG in securities referred to in Section 20 of Indian Trusts Act

Insurance Fund cannot be expended for any purpose other than payment of benefits under the scheme – clause 17(1)


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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 the CEO 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 the establishments to which the respective schemes apply 10 persons among employees


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Regulatory Mechanism –EPF ACT

The Central Board to act through its functionaries such as the the Executive Committee, Central Provident Fund Commissioner (CEO of the Board), Regional Commissioner.

Powers of Central Government Till the time the Board is constituted the CG shall administer he Fund 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 any order 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 punished with 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 of contravention of or non-compliance of any provision/requirement of the scheme shall be punishable with imprisonment that may extend to one year 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 gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments.

Authority: Different controlling authorities to be appointed by appropriate government for different states for the administration of this act.

Gratuity Fund: Employer to maintain a gratuity fund or shall obtain a insurance from the Life Insurance Corporation of India for his liability for payment towards the gratuity under 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 be punishable 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, maintained by the appropriate government.


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Insurance 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 whereby the payment of money is assured on death (except death by accident only) or the happening o any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include- The granting of disability and double or triple indemnity accident benefits,

if so provided in the contract of insurance; The granting of annuities upon human life; and The granting of superannuation allowances and annuities payable out of

any fund applicable solely to the relief and maintenance of persons engaged 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 servants commissioned 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. to collect

contributions and interact with participants allowing transfer of the benefits in case of change of employment and offer a basket of pension choices,

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

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


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New Pension Scheme

no contribution from the Government in respect of individuals who are 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 also have a voluntary tier-II withdrawable account at his option.

This option is given as GPF is proposed to be withdrawn for new recruits in Central Government service. Government will make no contribution into this account. These assets would be managed through exactly the above procedures. However, he would be free to withdraw part or all of the ‘second tier’ of his money anytime. This withdrawable account does not constitute pension investment, and would 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 the pension system. At exit the individual would be mandatorily required to invest 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 at the time of retirement. The individual would receive a lump-sum of the remaining pension wealth, which he would be free to utilise in any manner. Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, the mandatory annuitisation would be 80% of the pension wealth.

a central record keeping and accounting (CRA) infrastructure, several pension 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 easily understood information about past performance, so that the individual would be 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 will develop 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 executive order.

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

The option of joining the new system would also be available to the State Governments and as and when they decide, the new system would be capable 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 AND DEVELOPMENT) ACT

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

Clear distinction between policy and implementation – Policy is exclusive prerogative of CG and Regulation and 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 Assets


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Employee Law