The introduction of the National Pension System (NPS) is cold comfort for seniors battling inflation and spiralling cost of services, including health expenditure. Earlier, pensioners had ‘defined (assured) benefits’ but not any longer.
This shift in benefit raises many concerns. It would transfer the ‘risk’ from the government or the corporate sector to households and expose them to market vulnerabilities and volatilities.
“The new pension scheme is regulated and there should not be any apprehension as there will be complete transparency” says Yogesh Agarwal, Chairman, PFRDA. According to him, the customer has the choice of Public Pension Fund Manager or Private Pension Fund Manager. “Every year one can take a decision whether to continue with a particular manager.”
Governments everywhere, it is stated, are moving from traditional defined benefits to defined contribution. For years India has been following a pay-as-you-go system, where the government provides pension to its retired employees from the current year’s revenues. Nearly 2 per cent of the Gross Domestic Product (GDP) goes each year towards providing pensions and this number has been increasing.
The current fiscal deficit varies from 4.8 per cent to 5.2 per cent of GDP, and around 40 per cent is spent for retirement benefits. This number is rising. “NPS is likely to address this scenario as from defined benefit, the new pension system has moved to defined contribution,” says Raghvendra Nath, CEO of Ladderup Wealth Management, reflecting the view of the scheme’s votaries.
“While one can invest in various instruments for retirement planning, one needs to keep in mind that a sound retirement plan should provide returns that outstrip inflation, provide a level of guarantee to safeguard the retirement corpus and ensure that this corpus is accessed only for the purpose of post-retirement income”, says Tarun Chugh, Chief Distribution Officer, ICICI Prudential Life Insurance Company.
NPS is structured to enable investments in equity, corporate bond and debt. “If equity is chosen it is definitely the preferred asset class to achieve inflation-adjusted retirement corpus. NPS also allows auto choice which automatically changes equity exposure based on the age of an individual,”Mr. Chugh contends.
The New Pension System is complicated. There are four different agencies that a common man has to deal with. There is a record-keeper, there are points of presence, different fund managers, and finally, annuity providers. To add to the complexity there are different plans to choose from.