Page 47 - Banking Finance May 2025

ARTICLE

Tier II: A voluntary savings account with withdrawal
flexibility

Investment Options: The NPS offers two primary
approaches to investment:
1. Auto Choice (Lifecycle Fund): Asset allocation
automatically adjusts based on age
2. Active Choice: Subscribers can determine their own
asset allocation across:
o Equity (E): Maximum 75% allocation
o Corporate Bonds (C)
o Government Securities (G) Employee Contribution: 10% of basic salary plus
o Alternative Investment Funds (A): Maximum 5% dearness allowance
allocation Government Contribution: 14% of basic salary plus
dearness allowance
Distribution and Management:
Additional Voluntary Contributions: Allowed with tax
Points of Presence (PoPs): Banks and post offices that
benefits up to certain limits
facilitate enrollment and contributions
Special Provisions: Employees near retirement can
Central Record-keeping Agency (CRA): Maintains make additional contributions
subscriber records
Pension Fund Managers (PFMs): Professional fund Investment Framework
managers who invest subscribers' funds The UPS has a multi-layered investment structure:
1. Safety Layer (60-70% of corpus):
The Unified Pension Scheme (UPS): A o Government securities

New Approach o High-rated corporate bonds
o Guaranteed minimum returns
Background and Development
2. Growth Layer (25-35% of corpus):
The Unified Pension Scheme, introduced in October 2023
and implemented across central government institutions by o Equity investments
July 2024, represents a significant policy adjustment in India's o Alternative investments
approach to retirement security. The UPS emerged from: o International securities
1. Political pressure after several states reverted to the 3. Reserve Fund (5-10% of corpus):
OPS
o Counter-cyclical investments
2. Discussions between finance ministry officials, employee o Infrastructure bonds
representatives, and financial experts
o Government-backed projects
3. Financial modelling of long-term fiscal implications
4. Study of hybrid pension models from countries like Guaranteed Pension Benefits
Sweden, Netherlands, and Canada The core of the UPS is its guarantee structure:
Basic Guarantee: 50% of the average basic pay during
The resulting framework creates a middle path between the last 12 months of service
defined benefit and defined contribution approaches, with
what policymaker's call "guaranteed defined contribution." Service Bonus: Additional 0.5% for each year of service
beyond 20 years
Key Features of the UPS Maximum Benefit: 60% of average basic pay for
Contribution Structure employees with 40+ years of service

42 | 2025 | MAY | BANKING FINANCE