CONSTITUTION OF SUPPERANNUATION TRUST(SCHEME)

Introduction
A large part of the occupational retirement benefits in India are covered byEmployees’ Provident Funds andMiscellaneous Provisions Act 1952. The twomain schemes under the Act are Employees’ Provident Fund and EmployeesPension Scheme. Apart from these mandatory schemes the employerscan also provide for additional retirement benefits to their employees bysubscribing to group superannuation schemes. These benefits are in theform of superannuation schemes, wherein the employer contributes towardsthe employees and at the time of retirement, the employee is paid pension.Inspite of the fact that it ts not mandatory for the employer to purchase agroup superannuation scheme an employer has incentives to opt for a groupsuperannuation scheme because such a scheme not only enables the employeesto lead a better life after retirement, it provides a number of benefits tothe employer as well. It serves as a valuable tool to enhance the imageof a company, attract talented recruits and retain quality staff. Typicallyemployers either set up trust funds to manage these schemes or buy policiesfrom insurance firms. There is no one entity that regulates superannuationplans offered by employers and hence there is no data about how manysuch plans exist. One can only get information about plans that are soldby insurance companies. Accordingly the thrust of the paper is on theseplans. Section 2 talks about the ways in which these plans can be offeredto employers. Section 3 talks about the benefits of the schemes. Section 4talks about the market for superannuation schemes. Section 5 talks aboutthe regulatory lacuna with respect to the superannuation schemes. Section6 concludes.
2 Constitution of superannuation schemes
The group superannuation schemes are voluntary in nature. It is completelythe employer’s discretion whether he wants to opt for a superannuationscheme. The employer also chooses the class/classes of employees to whomhe wishes to extend the provision. He can choose the class of employees onthe basis of salary, designation, etc. However once the categories are decidedthe provision extends to all the employees falling in those categories. Anemployee can choose not to be a part of the scheme. In this case the employercontributes an equivalent amount to the employee’s salary. The employeescan also make contributions to the superannuation fund. In this case it willbe called Contributory Pension Fund Scheme. The employer can contribute3either a fixed amount to each employee’s account or a certain proportionof the employee’s salary. The contributions can be made annually, semi-annually, quarterly or on a monthly basis. Separate accounts are maintainedfor each employee. These accounts reflect the total accumulation in eachperson’s account.
A company can offer a group superannuation scheme in two ways.
• Through the constitution of a trust fund.
• Buying a superannuation scheme from a life insurance company
In either case the company has to follow the three steps listed below.
1. Appoint trustees to administer the scheme , draft the trust deed and pass it toestablish an irrevocable trust.
2. The Board of Directors of the company has to pass the resolution for opting for aparticular scheme.
3. An application has to be filed with the Commissioner of Income Tax (CIT) forapproval of the scheme.
In case the company decides to go via the trust fund route, it will then haveto appoint fund managers for the investment purposes. Once the permissionhas been granted, the employer would then remit the monthly contributionsto the fund who would manage the contributions. In the case of buying apolicy from an insurance company, the superannuation trust would then haveto do the following
1. Forward the proposal form signed by trustees to the life insurance company.
2. Supply data about age of employees along with the contribution to the life insurancecompany.
Currently there are fourteen life insurance companies in India registered withthe Insurance Regulation and Development Authority (IRDA) out of whicheight offer group superannuation schemes. These nine companies are
• Life Insurance Corporation of India.
• ICICI Prudential Life insurance company Limited.
• TATA AIG Life Insurance Company Limited.
• MAX New York Life Insurance Company Limited.
• Bajaj Allianz Life Insurance Company Limited.
• AMP Sanmar Assurance Company Limited.
• Kotak Mahindra Old Mutual Life Company Limited.
• Birla Sun Life Insurance Company Limited.
• Aviva Life Insurance Company India Private Limited.
These companies provide a wide variety of schemes. An employer cansubscribe to any scheme of their choice. Most insurance companies are willingto customise the scheme so as to make it suitable for the employer and theemployees.The appointment of trustees to administer the scheme is one of the definingfeatures of the scheme. The rationale behind the administration of thescheme through trustees is to ensure that the employees’ interests aresafeguarded and the benefits that accrue to them are not affected by theemployer’s financial position. The trustees are responsible for collectingthe contributions from the employer and from the employees (in case of acontributory pension fund), buying the group superannuation from a lifeinsurance company, paying the benefits to the employees once they separatefrom the company and look after the accounts. The trustees can use theirdiscretionary powers for the settlement of benefits in unusual circumstances.The trustees should maintain all regulatory requirements prescribed underthe Income Tax Rules 1961.
3 Benefits
3.1 Benefits after retirement
On retirement the employee is allowed to take one third of the accumulationin his account as commutation. The balance in the corpus is used to purchasean annuity. Apart from LIC all other life insurance companies allow itscustomers to purchase annuity from any annuity provider. The annuity ratesare the rate prevailing in the market for the chosen annuity at the time of theemployee’s retirement Once the annuity rate is decided it remains unaffectedby market fluctuations in the annuity rates.
3.2 Tax benefits
If the group superannuation scheme purchased by the employer is approvedby Commissioner of Income Tax (CIT) then both employer and employeesare eligible to get tax benefits. Schedule 4 of the Income Tax Act lists theconditions that are essential for the superannuation funds to qualify for taxbenefits. These conditions are as follows;
• The fund should be a fund established under an irrevocable trust.
• The fund should belong to the employees of an organization carrying on businessin India and at least 90% of the employees should be employed in India.
• The sole purpose of the fund should be to provide annuities for the employees inthe organisation.
• The employer should contribute to the fund.
• All pensions and annuities should be payable in India
3.2.1 Tax benefits to the employer
The annual contributions by the employer are treated as deductible businessexpense as per Section 36(1)(iv) of the Income Tax Act.. However themaximum amount that is tax deductible is 27% of the employees’ salary.This 27% includes the contribution made towards the mandatory EPF &EPS.
3.2.2 Tax benefits to employees
The employees get the following benefits• Contribution by employer is not treated as a perquisite in the hands of theemployees.as per Section 17(2)(vi)• Interest income is tax free• Commuted value upto 1/3rd on retirement is tax free as per Section 10(10A)(II) ofthe Income Tax Act.• Benefits payable in case of death are exempt as per Section 10(13) of the Incometax Act• Employees’ contribution if any qualify for tax deduction under Section 88 of the ITAct.
3.3 Option on changing employer
If an employee moves from on job to another he has the following threeoptions• He can get the amount transferred to the new employer’s superannuation schemeif the rules of both the schemes allow.The employee can opt for getting the pension from the normal date of retirement.In this case the old employer would cease to contribute to the scheme but interestwould accrue on the accumulated amount.• He can opt for an immediate annuity with optional commutation . In this case thebenefits are taxable.
3.4 Life insurance policy
Most life insurance companies offer the employer the option of purchasinga group life insurance policy along with the group superannuation policy .In this case a lesser premium needs to be paid for the group life insurancepolicy. If the group life insurance policy is purchased a lump sum is paid tothe beneficiary in case the employee dies while in service. This is apart fromthe annuity that the beneficiary receives
3.5 Other Benefits
The insurance companies also provide advice regarding investment optionsand annuities. The members are regularly given statement showing thevalue of their accumulation. Some companies also organize meetings withthe employer.
3.6 Loans
The life insurance companies are not allowed to make any loans to membersof the group superannuation scheme
4 Market for superannuation
The LIC is by far the largest player in the superannuation industry andits coverage has been showing regular increase. However after the privateplayers were allowed to enter the insurance sector in the year 2001, they havebeen steadily expanding their business. Max New York and Bajaj Allianzhave recently received approval for launching the scheme. Together thesecompanies have the capability to offer wide range of products.The LIC offers a non unit linked scheme. On retirement a subscriber canchoose one out of five pension schemes offered by LIC. They are
• Life pension ceasing at death.
• Life pension with return of capital and group pension terminal bonus on death.
• Life pension guaranteed for 5, 10, 15. 20 years and life thereafter.
• Joint life pension payable on the last survivor and the spouse.
• Joint life pension payable to the last survivor of the employee and spouse withreturn of capital on the death of the last survivor.
TATA AIG was the first private company to receive approval to enter intopension business in 2001. It was also the first private company to launch agroup superannuation scheme. It offered a non unit linked product. Withthe recent approval from IRDA to launch unit linked products TATA AIG iscurrently the only company to offer both unit linked and non linked groupsuperannuation schemes.
All other life insurance companies offer unit linked schemes. In such schemesthe contributions are converted into number of units based on the prevailingNet Asset Value of the unit. At the time of retirement, the units in theindividuals account would be redeemed at the prevailing NAV to calculatethe accumulation.
4.1 Investment pattern
Investment of the superannuation funds has to be done by the insurancecompany subject to the IRDA investment guidelines 2001. The investmentpattern for the non linked products are as follows 1)Not less than 20%in government securities 2)not less than 40% in government or approvedsecurities (including (1) above) 3)not less than 60% in approved investmentsIn case of linked pension products the investment would be according to theobjectives of the fund subject to the conditions that 1)The entire fund cannotbe invested in equities 2)The investment in other than approved securitiesshould not exceed 25