The story so far: Started as the New Pension Scheme for government employees in 2004 under a new regulator called the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension System (NPS) has been open for individuals from all walks of life to participate and build a retirement nest-egg. Given the dominance of informal employment in India, the Employees’ Provident Fund Organisation , which is contingent on a formal employer-employee relationship, only covers a fraction of the workforce. The NPS has been gradually growing in size and now manages ₹5.78 lakh crore of savings and 4.24 crore accounts in multiple savings schemes. Of these, over 3.02 crore accounts are part of the Atal Pension Yojana (APY), a government-backed scheme for workers in the unorganised sector that assures a fixed pension payout after retirement. The rest constitute voluntary savings from private sector employees and self-employed individuals, for whom some significant changes are on the anvil.
What overhaul is the PFRDA planning?
The law regulating the NPS allows members to withdraw just 60% of their accumulated savings at the time of retirement. With the remaining 40%, it is mandatory to buy an annuity product that provides a fixed monthly income to retirees till their demise. Members who accumulate up to ₹2 lakh in their NPS account at the time of retirement are exempted from the mandatory annuitisation, and can withdraw the full amount.
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Last week, PFRDA chairman Supratim Bandyopadhyay said this limit will soon be revised to ₹5 lakh . Separately, the regulator has decided that the annuity purchase stipulation for 40% of members’ retirement corpus should be dropped altogether. Legislative amendments to this effect are being worked out for Parliament’s approval.
What prompted this rethink?
Falling interest rates and poor returns offered by annuity products had triggered complaints from some members and experts about the compulsory annuitisation clause. “If someone opts for a lifetime annuity at retirement with a return of purchase price to the nominee once the person dies, the rates are varying between 5% and 5.5%. Since annuities are taxable, deducting the tax and factoring in the inflation means annuities are yielding negative returns,” Mr. Bandyopadhyay pointed out.
With retail inflation running at about 5%-6% over the past year, the returns on annuities are, in fact, negative, even if one does not factor in the tax. To avoid forcing people into such an unattractive investment, the regulator has now proposed to give members a choice to retain 40% of their corpus with the NPS fund managers even after retirement. This, the PFRDA chief believes, will allow them to get better returns, and these savings can be paid out to members over 15 years through something like the systematic withdrawal plan offered by mutual funds. While this change shall need Parliament’s nod, the expansion of the annuity-free withdrawal limit from ₹2 lakh to ₹5 lakh is being done immediately. “Suppose somebody reached ₹2.1 lakh at retirement, he will get an annuity component of ₹84,000, which, today, will give an income of ₹400 or ₹450 a month — a pittance. So, now, we will allow those with savings up to ₹5 lakh to take the entire corpus out if they choose,” the PFRDA chief said.
Are there any other tweaks in the works?
While different schemes under the NPS have given reasonable returns at a low fund-management cost so far, there has been a clamour for a guaranteed return product for large sections of potential investors with a high aversion to risk. An actuary is being appointed to suggest the design for such a product and the PFRDA hopes to launch its first guaranteed product soon.
At least three more fund managers are expected to be appointed soon, which will take the total managers to ten. Age restrictions to join the NPS are also being eased to allow people to join the scheme up to the age of 70 years, from 65 years earlier. The reason is that over 15,000 recent NPS members joined after the age of 60 since the age limit was raised to 65 years from 60 years in 2017. So, as Indians’ overall longevity improves, the population of “retired, but not so tired” will also have access to the NPS.