The Centre has allowed pension funds to invest up to 50 per cent of their funds in equities, and has offered tax benefits to make the schemes popular.

It also announced the setting up of a five-member interim Pension Fund Regulatory and Development Authority and permitted fund managers to invest abroad.

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In a release issued on Wednesday, the finance ministry said, to attract employees in the private sector to take out pension policies, it was considering introducing a new type of futures product. These will provide a hedge against fluctuations in returns on such policies.

It added that the interim PFRDA would be headed by a chairman, not below the rank of a secretary, along with four members of whom two would serve full time.

The chairman and members will be appointed by the Centre from among persons with knowledge of economics, finance, legal and administrative matters. The new pension system, compulsory for new government employees, was cleared by the Cabinet on Saturday.

The long-delayed reform will over the next two decades slash the government's annual pension bill from the projected Rs 30,000 crore (Rs 300 billion). It is Rs 22,000 crore (Rs 220 billion) at present.

The release is, however, silent on the effective date from which the new scheme will come into operation. All new central government employees, except those in the armed forces, will have to compulsorily opt for the scheme, while it will be voluntary for those who are self-employed or under the ambit of Employees Provident Fund and other special provident funds.

As per the new regulations, any contribution to pension funds will get a tax benefit under Section 88 of the Income Tax Act, but the income will be taxed on maturity.

There will be two tiers of pension policy with each offering three types of options, ranging from investments in predominantly fixed-income instruments to almost 50 per cent exposure to equity.

For central government employees subscribing to any one of the Tier I pension policies will be compulsory, including those who will join Class I services.

The monthly contribution per employee will be 10 per cent of their salary and DA, which will be matched by an equal contribution by the government.

To make up for the loss of government provident fund, these employees can also contribute to the Tier II slab, but without any contribution from the government or additional tax benefits.

Individuals will have to contribute to the Tier I scheme till the age of 60. Thereafter, 40 per cent of the sum will be mandatorily invested in annuity schemes of life insurance schemes. There will be a central record-keeping and accounting infrastructure to ensure that individuals can switch between policies if they are transferred.

New initiatives

• Pension policy compulsory for new central government employees
• Policy based on defined contributions and payable through banks and post offices
• Interim pension regulator set up
• State governments can also join the scheme later