In a move that will revolutionise the way pensions are paid in the country, the Cabinet today decided to give employees a say in how their contributions should be invested. If you are a new government servant, you can even opt for high-risk equity investment if you want high returns and have the stomach for the risk that goes with this. A pension regulator will be put in place to oversee the sector, which will see defined contribution schemes replacing defined benefits. This means, the amount of pension you get will no longer be pre-determined, but depend on the choices you make. Both you and your employer, the government, will have to contribute 10 pc of the salary and DA to the scheme. The pension contribution and accumulation would enjoy tax preferences up to a limit. On maturity, however, you will be taxed on the benefits. The new regime clears the way for a number of pension fund managers, at least one of which will be from the public sector. An employee will have the option of switching between pension fund managers and different options: • Under Option A, the safe option, the pension managers would invest 60 per cent of the contribution in low-risk but low-yielding government papers, up to 30 per cent in corporate bonds and 10 pc in equity • Option B is the medium risk option. The pension manager will invest up to 40 per cent in government papers, 40 per cent in corporate bonds and 20 per cent in equity • The high-risk but potentially high-yielding Option C will see half the contributions invested in equities. Meanwhile, 25 per cent would be invested in government papers and 25 per cent in corporate bonds The scheme even allows pension funds to invest abroad though it says nothing about foreign direct investment. At the heart of the new scheme will be a central record-keeping agency that would maintain a database of investors and investments. When you exit the scheme, you will have to invest 40 pc of your pension to purchase an annuity from a life insurer. You will get the remaining 60 per cent in cash.
