NPS Trust

Somebody has to own the securities the NPS buys. It cannot be the fund manager, who is paid a fee and could fail. It cannot be the recordkeeper, who only keeps records.

It is the NPS Trust. It is a trust set up under the Indian Trusts Act, and PFRDA is the settlor. Its primary function is to hold and manage the assets and funds created out of the contributions made by subscribers, held in their beneficial interest.

Everything a pension fund buys is registered in the name of the NPS Trust and sits in the Trust's custodial account. The subscribers are the beneficial owners.

The Trust has a second job as well. It monitors and evaluates the functioning of all the intermediaries — the recordkeeper, the points of presence, the trustee bank, the pension funds and the custodian.

And a third, at the end of the journey. It is responsible for receiving, processing and settling the claims a subscriber makes on exit.

Constitution. A trust under the Indian Trusts Act, with PFRDA as settlor. The creation of the Trust, the appointment of trustees and the duties of the Board are defined by the trust deed executed by PFRDA in favour of the trustees and by the PFRDA (National Pension System Trust) Regulations, 2015. The Board has fiduciary responsibility for the funds and for protecting subscribers' interests.

The Board of Trustees.

A trustee must be a citizen of India, a person of ability, integrity and standing, not convicted of any economic offence or violation of securities laws or found guilty of moral turpitude, and suitably qualified and experienced in law, economics, finance, accountancy, social welfare or administration with management skill and experience.

Who cannot be a trustee. No intermediary of the NPS, Director or Sponsor, officer or employee is eligible. A person may not hold office unless they relinquish any position as trustee of another pension trust, or as a director — including independent director — of any PFRDA-registered intermediary or its sponsor. This does not apply to a trustee appointed by PFRDA on a nomination from the Central or a State Government by virtue of employment with that Government. Office may also be vacated by death, resignation, disqualification on account of mental or physical ability, an offence, or dereliction of duty.

The CEO. PFRDA may appoint a qualified and experienced Chief Executive Officer to run the daily affairs. The CEO is not a trustee, and manages day-to-day administration under the supervision and direction of the Board, aided by the Trust's staff.

Operations. The Trust enters into an Investment Management Agreement with the pension funds. It opens and operates accounts with the trustee bank and the custodian on behalf of subscribers. Securities bought by each pension fund in dematerialised form on behalf of and in the name of the NPS Trust are held in the custodial account of the NPS Trust. The Board may monitor scheme performance continuously, review all transactions by the pension funds, and submit its report to PFRDA. It must ensure accurate and timely dissemination of information on investment policies and objectives to subscribers.

Due diligence, in two grades.

Code of conduct. Trustees must act in good faith and in the best interests of subscribers, with reasonable care and prudence, and with skill, competence and diligence; ensure there is no conflict of interest; deal fairly with all entities of the NPS system; maintain high standards of integrity; render a high level of service; maintain confidentiality; and communicate with the authorities in a timely manner.

Grievances and escalation. The Trust runs its own grievance channel — email to grievances@npstrust.org.in, letters to its Grievance Redressal Officer, or the CGMS. A subscriber whose grievance has not been resolved within 21 days by the Trust, or who is dissatisfied with the resolution, may appeal to the PFRDA Ombudsman. Unresolved matters are escalated internally to the Trust's Chief Grievance Redressal Officer after 2 weeks.

Other functions. The Trust's prior sanction is what makes an assignment of accumulated pension wealth possible at all, which is the sole exception to the NPS's protection from attachment. Its website carries consolidated NAV and return data for every pension fund, which is where a subscriber comparing funds is told to look. And the Union Budget of 2019-20 announced that steps would be taken to separate the NPS Trust from PFRDA with an appropriate organisational structure, to maintain an arm's length relationship.

Trace a single Rs 10,000 contribution to see where the Trust appears.

At no point does the subscriber's name appear on a security, and at no point does the pension fund's name appear on one either. That separation is the entire purpose of the Trust.

A governance case. The Board is reviewing pension fund performance and the special due diligence pack throws up two problems: one pension fund's auditor has flagged repeated valuation errors, and a PoP has missed its service level agreement on contribution upload for three consecutive quarters.

A composition case. The Trust has nine trustees. One of them, appointed at 65, completes three years and the Board wishes to extend him. The regulations allow a tenure of 3 years to be exceeded by a maximum of 2 years — but he is now 68, and any extension must stop before he attains 70. A second candidate is proposed: an independent director of a PFRDA-registered pension fund. He is ineligible unless he relinquishes that directorship, and in any case no intermediary's director may be appointed. A third proposal, a State Government officer nominated by that Government, is permitted despite holding a position by virtue of that employment, because of the express carve-out.

And if all nine resigned at once, the Trust could not run: the Board must have at least five trustees.

Chapter 4 introduces the NPS Trust as the first of the NPS constituents, with the Indian Trusts Act, PFRDA as settlor, the beneficial-ownership point and the 2019-20 Budget separation announcement. Chapter 9, section 9.4, item 5 (PFRDA (National Pension System Trust) Regulations, 2015), supplies the composition, tenure, eligibility, operations, due diligence and code of conduct. Chapter 9, section 9.6, gives the grievance escalation, and Chapter 5, section 5.6.3, points a subscriber at the Trust's website for fund data.

Expect the numbers: minimum 5 and maximum 11 trustees, a 3-year tenure extendable by a maximum of 2 years, and the age bar at 70. Expect who holds the securities bought by a pension fund (the NPS Trust, with subscribers as beneficial owners), the split between general and special due diligence, and the ineligibility rule for intermediaries and their directors. The 21-day trigger for an Ombudsman appeal against the Trust is asked in the grievance chapter.

• The Trust holds the assets; the pension fund manages them. Securities are in the Trust's name and in the Trust's custodial account, however they were selected.
• Subscribers are beneficial owners, not legal owners. Their beneficial interest is limited to their holding in the scheme.
• 5 to 11 trustees. Not 3 to 7, and not a fixed number.
• Tenure is 3 years, extendable by a maximum of 2 — but the age cap at 70 overrides it. A trustee cannot hold office after 70 whatever their tenure arithmetic says.
• The CEO is not a trustee. PFRDA appoints the CEO to run daily affairs under the Board's supervision.
• No intermediary, director, sponsor, officer or employee may be a trustee, and a sitting director of a PFRDA-registered intermediary must relinquish that role. The only carve-out is a Government-nominated trustee holding a position by virtue of that employment.
• The NPS Trust is itself an intermediary under the PFRDA Act, even though it supervises the others.
• General and special due diligence are different lists. Protection of trust property and SLA test checks are general; audit-report review, compliance reports and trustee meetings are special.
• PFRDA is the settlor, not the trustee. And the 2019-20 Budget announced separating the Trust from PFRDA, so treating them as one body is wrong.