Atal Pension Yojana (APY), a voluntary co-contributory pension initiative aimed at providing access to pension for individuals from across the income groups, was announced in the Union Budget 2015.
The scheme comes at an opportune time because the need for an economically viable and inclusive system to support an ageing population is rising. As per the UNFPA and Help Age India report, the elderly population (above 60 years) was 10 crore in 2012, which was 8% of India’s total population. The report claimed that the elderly population would increase by around 11% by 2050. The UN’s World Population Ageing 2013 report shows that India will have the second largest population of people above the age group of 80 with 37 million people by 2050.
In 2004, The National Pension Scheme(NPS) was introduced with the express intention of providing retirement benefits to all citizens. The initial launch was limited to new government employees (except armed forces), but this changed in 2009 when citizens on a voluntary basis could enroll in the scheme. In 2010, “The Swavalamban Yojana” was set up with the objective of providing retirement benefits for the informal sector. Under this scheme, the government provided matching contribution worth ₹1000 for an NPS member making contributions between ₹1,000 and ₹1,200 p.a. The payout, consisting of a lump sum payment and annuities, was scheduled to happen after the subscriber reached the age of 60.
In the recent budget, the NDA government has subsumed the Swavalamban Yojana under Atal Pension Yojana. All contributors under Swavalamban would automatically be transferred to APY unless they chose to opt out.
Unlike Swavalamban, benefits under APY is guaranteed by the government in terms of fixed pension. The monthly contribution needed for the APY is pre-defined along with the monthly pension and the corpus amount that would be received at the end of 60 years. As per the scheme, to get a corpus between ₹1.7 Lakh and ₹8.5 Lakhs, the subscriber has to contribute between ₹42 and ₹210 on a monthly basis, that is if (s)he joins at the age of 18 years. For the same range of monthly contribution and the year of joining, the scheme ensures a monthly pension varying between ₹1000 to ₹5000. For instance, an individual would have to contribute ₹210 from the age of 18 years to 60 years in order to receive a corpus of ₹8.5 Lakhs and a monthly pension of ₹5000.
The range for the monthly contribution has been set in a manner that allows the subscriber to opt for the scheme based on income. For instance, a subscriber from a lower income group unable to spend ₹1,454 for 20 years to get the monthly returns of ₹5,000 can opt for the scheme which is compatible to his or her income. However, the ones who can afford a higher monthly contribution can opt for a scheme that guarantees a higher monthly pension.
An additional feature of APY is that the contributions can be made by individuals only between ages 18-40 years. The cost of exit is high as exit before 60 is allowed only in the case of exceptional circumstances such as death of the beneficiary or if (s)he suffers from a terminal disease. This allows for accumulation of funds for longer periods, resulting in higher returns thanks to compounding. The returns are further augmented by the government, which will contribute ₹1,000 or 50% of the contribution (whichever is less) for 5 years annually.
The organisational structure for APY will be regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The PFRDA consists of a three tier management system for all its pension schemes. It includes
- The Point of Presence (PoPs) – referring to banks that act as subscriber interface
- The Pension Fund Managers (PFMs) – The asset managers responsible for offering investment options and making optimal decisions on behalf of the subscribers wherever necessary
- The Central Record Keeping Agencies (CRA) – Are communication channels that maintain the links between the PoP and PFM. The CRA is also tasked with maintaining the contribution records
The Pension fund managers are SBI pension funds, UTI retirement solutions and LIC pension fund, each managing a specific proportion of contributions. The Central government employees’ fund is invested in the proportion of up to 55% in Government Securities, up to 40% in Debt Securities and up to 5% in Money Market Instruments.
NPS uses the existing network of banks and post offices to penetrate the rural areas. The postal and bank savings accounts provide the necessary platform for the government to transact with its subscribers.
A bank account is therefore a necessary prerequisite to join APY. The problem of identity proof that existed for long in rural India has been assuaged by the introduction of Aadhar – the unique identification project instituted by the Government of India to identify citizens. SMS alerts are used to communicate the necessary details with the subscribers.
The challenge with most pension schemes is the continuity of contributions and in order to incentivise the subscribers to contribute regularly, a nominal ‘fine’(ranging from ₹1 to ₹10) is charged for any delay in contribution—interestingly, the amount collected as a ‘fine’ is added into the final accumulated balance of the subscriber.
The two key aspects that can potentially help reach a wide subscriber base for APY are the use of well infiltrated existing structure of NPS and the guarantee provided by government. It remains to be seen how efficiently the government can link the scheme with the Pradhan Mantri Jan-DhanYojana(a scheme to improve financial inclusion) to attain higher levels of efficiency
APY is the latest example of schemes by the government of India to solve for the problem of old age pension in an increasingly ageing society. That said, it will be interesting to see how the government will address the challenges of implementation of the scheme and inclusion of citizens with irregular streams of income.
Devika Kher is a research associate and the head of admin at The Takshashila Institution. She tweets @devikakher.
Varun Ramachandra is a policy analyst at The Takshashila Institution and tweets @_quale.
Image credits: Simon Cunningham