Transcript PRBS presentation :ASTO Ahmedabad

Defined Benefit Vs. Defined
Contribution
Existing
PRBS
(Post
Retirement Benefit Scheme)
is a defined benefit scheme.
From 01.01.2007 the Scheme
will be converted to a defined
contribution scheme.
Defined Benefit
Defined Benefit Scheme: A defined benefit (DB)
plan is a plan in which the benefit on retirement
(pension) is determined by a set formula. For
example Rs.100 pension for each month of
service.
The funds are managed from a common pool to
which the employer and plan members
contribute.
Defined Contribution
Defined Contribution Scheme: In a defined
contribution plan, contributions are paid into an
individual account for each member. The
contributions are invested and the returns on
the investment are credited to the individual's
account. Similar to our PF account. On
retirement, the accumulation in the member's
account will determine the pension.
The New Scheme
As per the DPE Guidelines, an employer can
contribute 30% of an employee’s Basic + DA
towards retirement benefits w.e.f. 01.01.2007.
The retirement Benefits include PF, Gratuity,
Medical Benefits and Pension.
Currently 12% is contributed towards PF,
gratuity accounts for 1.5%. Medical benefits for
the period 2007 to 2012 are valued at 1.5%.
The New Scheme
The balance 15% will be contributed towards the
pension scheme. (The medical benefits and gratuity
% will be reviewed every year, as such the % of
pension contribution will vary)
In addition to the employer contribution, employee
will contribute 3% of his Basic + DA (Contribution to
start from 01.04.2012).
Further the existing contribution equiv. to Uniform
Allowance will continue without any change.
The New Scheme
Thus the individual’s pension account will receive
three contributions:
Employer’s
Employee
Contribution + Contribution
(balance of 30%)
3%
Amount
+ Equiv. to
Uniform all.
The trust will invest this amount and interest
credited to individual’s account.
The Existing Scheme
The Total corpus under PRBS as on 31.12.2006 is to
be transferred to the individual account under the
new scheme through a defined formula.
Under the new scheme each employee will get a
regular monthly employer contribution to his
account. The later the retirement beyond 2007, the
more the contribution will be. While employees
retiring nearer to 2007 will not be able to build a
big corpus under new scheme
Conversion of the Existing Scheme
As such the conversion formula takes into
account the length of service the employee
has put in till 31.12.2006, the period for
which he has been a member of the PRBS
and his basic pay as on 01.01.2007
(revised).
The formula aims to provide benefits in
terms of the above three factors.
Conversion Formula
The conversion formula is:
Every employee who has completed 33 years of
reckonable service (as defined under the PRBS)
will be given a pension of 50% of his basic salary
as on 01.01.2007. This pension amount will be
converted into annuity corpus by multiplying
with the annuity factor of 132.59669 (the rate as
on 31.03.2012).
Conversion Formula
For example if an employee has a basic salary of
Rs. 50000 as on 01.01.07 and has completed 33
years of reckonable service. The pension
amount will be
50000 * 50% = Rs. 25000
And the conversion corpus will be:
25000 * 132.59669 = Rs. 33,14,917
Conversion Formula
The percentage pension will be proportionately
reduced for reckonable service less than 33 years.
For example if the employee has completed 25
years of reckonable service with basic as 50000 as
on 01.01.2007. The applicable conversion pension
will be:
50% * (25/33) * 50000 = Rs. 18939.39
And Conversion pensionable corpus will be
18939.39 * 132.59669 = Rs. 25,11,300.95
Conversion Formula
However the conversion benefit will be payable
only on the date of retirement i.e. the employee
has earned the pension benefit but the pension
has not become due. It is due only on the date
of retirement.
If in the example above, the employee is actually
retiring on 30.06.2015, the pension corpus of Rs.
25,11,300.95 earned by him as on 01.01.2007 is
payable only on 30.06.2015.
Conversion Formula
The corpus to be transferred to the employee’s
account as on 01.01.2007 will be arrived at by
calculating the present value (as on 01.01.2007)
of Rs. 25,11,300.95 payable on 30.06.2015.
In simple terms it means how much should be
invested as on 01.01.2007 given a return
percentage so that it grows to Rs. 25,11,390.95
on 30.06.2015.
The return percentage is the discounting factor.
Conversion Formula
The rate of return or the discounting factor used in
the conversion formula is 9.5%. So the conversion
benefit in the above example will be the amount to
be invested on 01.01.2007 which earns 9.5% every
year, so that it grows to Rs. 25,11,300.95 on
30.06.2015, which will be:
2511300.95 / (1+9.5%)^8.5 = 11,61,124.39
Thus Rs. 11,61,124.39 will be transferred to the
employee’s account in the new scheme from the
old scheme.
Conversion Formula
Thought the scheme is applicable from 01.01.2007.
The DPE guidelines had been finalised only by 2009.
The conversion workings were completed by 2012.
As such the effective date of corpus transfer has
been kept as 31.03.2012. So the discounting of the
conversion corpus will be done till 30.03.2012
instead of 01.01.2007.
In the example above, the conversion corpus will
be: 2511300.95 / (1+9.5%)^3.25 = 18,69,833.23
Conversion formula
As a result of the conversion formula, the conversion
corpus for some of the members will fall below the actual
contribution put in by the members till 31.12.2006.
For such cases the contribution made till 31.12.2006
along with 8.5% interest will be the conversion corpus.
Thus the higher of the contribution with 8.5% interest or
the amount arrived at by the conversion formula, will be
transferred to employee’s account.
As per our analysis, officers joining on or after 1995 will
have to be provided protection of corpus with interest.
Conversion Formula
Based on the above conversion methodology,
the fund position as on 31.03.2012 was
reviewed and a shortfall of Rs. 1624 crores was
envisaged.
The infusion of this amount for conversion of
the scheme has been approved by the ONGC
Board as well as the Ministry.
Income Tax Impact
As per section 17(2)(vii) of the IT Act any
contribution by the employer to the
superannuation fund of an employee above Rs.
1.00 lac is taxable.
During the Year 2007 & 2010 PRBS was reviewed
and around Rs. 900 crs & Rs. 160 crs. was
infused by ONGC in the scheme. This infusion
had exhausted the exemption limits for the
years 2007-08 to 2010-11.
Income Tax Impact
The conversion is being effected in the year
2013-14. Thus for tax purposes, the
consolidated impact from 2007-08 to 2013-14
will be considered i.e. the employer’s
contributions made from 2007-08 to 2013-14
along with conversion corpus received from Rs.
1624 crore infusion as reduced by the
exemption limits for the year 2011-12 to 201314 (Rs. 3.00 lacs) will be taxable.