Government-appointed commission to examine how NPS may be enhanced for employees: Chairman of PFRDA Deepak Mohanty

 Government-appointed commission to examine how NPS may be enhanced for employees: Chairman of PFRDA Deepak Mohanty

This year, the PFRDA chairman will focus on improving pension knowledge and awareness as well as expanding the corporate sector, individual National Pension System (NPS), and Atal Pension Yojana (APY) subscriber base. The bare minimum assured yields scheme (MARS) and the systematic withdrawal plan involving a lump-sum 60 percent of the NPS pension capital are also on the table this year. The government has also been contacted by PFRDA regarding the possibility of replacing the mandatory annuitization of 40% of the NPS corpus with a systematic withdrawal strategy.

Despite being a good financial option, the National Pension System (NPS) has recently been under political fire. Some state governments have chosen to reinstate the old pension system (OPS) for public employees in the past year.

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On the other hand, NPS plans have continuously outperformed all government plans, corporate and individual models (all citizens' plans), and Atal Pension Yojana (APY), and have seen increases in subscriber bases.

The programme, however, would not be able to fully realise its potential as long as India's knowledge of the importance of long-term retirement planning and a safety net after retirement is inadequate.

Deepak Mohanty, leader of the Pension Fund Regulatory and Development Authority (PFRDA), who took over in March 2023, spoke exclusively with Moneycontrol's Preeti Kulkarni about his goals for the NPS ecosystem, his ideas for a minimum assured returns programme, and the importance of starting to save early for retirement to ensure a sizable corpus.

He also expressed his opinions on how the NPS, unlike the former pension scheme (OPS), might be advantageous for government employees while not providing an inherent guarantee on returns. Edited passages:

You took over as chairman more than two months ago. 

We wish to enlarge the intermediary space, improve accessibility to digital resources, and increase pension coverage. Another thing on our goal is to improve pension literacy. The main goals are those listed above.

How can you try to increase employee acceptance of NPS in the private sector? Have you set any goals?

We reached the milestone of 10 lakh new NPS subscriber applications in the non-government (private) sector during the most recent fiscal year, 2022-2023. Employees in the public sector automatically participate in the NPS system.

We are obviously concentrating on the private sector. It is made up of both business entities and people. Our goal for this year, 2023–2024, is 13 lakh. The number of subscribers to the Atal Pension Yojana (APY) is 5.25 crore. We could accomplish about 1.2 crore in 2022–2023. We intend to increase this figure to 1.3 crore in 2023–2024. Additionally, we are putting more effort into broadening NPS reach through regional rural banks (RRB).

Do you think NPS has reached its full potential given its investor-friendly nature?

Yes, because the overall coverage is significantly lower than the potential. Although we have onboarded about 13,000 corporates, the employee adoption rate is rather low. Women (subscribers) are less prevalent in terms of gender than men. Why then not NPS for kids? Along with establishing the practise of saving early on, you may definitely take advantage of compounding. Then, if you look at professionals that work for themselves, they may be making a fantastic living, but they have not fully utilised this specific product (NPS). The potential is therefore extremely broad in this circumstance.

Any other organisations on which you will concentrate this year?

In addition to our efforts to increase public understanding of pensions, we intend to collaborate with businesses and their HR departments to spread the word about NPS. You should often choose the (Employees') Provident Fund as your default option. That leaves a legacy. However, the young people here, in particular, don't stick to one profession. They may occasionally choose not to work or pursue their own interests. NPS is a flexible solution in this case because it has a single PRAN (Permanent Retirement Account Number) that may be used for several occupations and locations. Investments can be made initially as a corporate subscriber and afterwards as an individual, and vice versa. So, in order to inspire individuals, we need to raise knowledge of the advantages.

Is the low-cost structure of NPS keeping brokers from pushing all out to promote the scheme, despite the fact that it is a low-cost, investor-friendly tool that has produced outstanding returns over the years? Though the expense ratio was updated, is it still sufficient?

In my opinion, no. In 2022, there was a significant revision (upwards) to the cost structure. It is quite practical given the possibilities of NPS. Expense ratio is currently sufficient and presents a workable idea. When someone enters, they can easily turn a profit. It is therefore possible for them to set aside money for this venture.

The PFRDA has previously said that it intended to introduce a programme with a minimum assured return. How has the situation changed?

The minimal assured return programme has been planned for a while. It is a top priority for us. Additionally, our statute mandates that we provide this promise. However, the price will inevitably increase if a guarantee is required. Due to the cheap cost of operation and the fact that they are mostly pass-through vehicles, pension funds have very little capital. There will be a change in that nature if you offer a guarantee. Along with to the cost of the guarantee, there will also be more money and solvency requirements. Risk, cost, and return must therefore be balanced. It will be your responsibility to deliver a return that appeals to the market.

Therefore, we are still working on this procedure; it should be successful, but I am unable to provide a timeframe. We ought to be able to come up with something soon. In addition to 40 percent forced annuitization, PFRDA was considering providing a systematic withdrawal plan option, which would necessitate changing the PFRDA Act. Is this still a possibility? We need to reform the statute in order to provide alternatives to annuity products. We've brought up this issue with the government. Therefore, it is still a possibility.

However, in the interim, we have decided to permit the systematic withdrawals plan alternative for the 60% portion (NPS subscribers can take up to 60% of the corpus upon vesting as a free of taxation lump sum, with the remaining 40% being forced into annuities). So, a person who retires at age 60 may continue to receive benefits until age 75. This is going to happen very soon, possibly by the end of this quarter.

Many people are talking about how certain state governments want to go back to the previous pension system. What are your thoughts on these events as the head of the PFRDA and a member of the committee established by the finance minister to examine the pension plans for public employees?

Both of them are distinct structures. The fact that NPS is fully funded is crucial in this scenario. OPS is a non-funded project. There is a trend towards fully-funded pension plans on a global scale. Therefore, from the perspective of sustainability, this is a crucial issue. Having said that, some states want to reject the NPS for a variety of reasons. A committee has also been formed. To determine how NPS might be further enhanced for government employees is one of the terms of reference. So it's too early to make a judgement.

But from the viewpoint of government personnel, why do you think they should select NPS? What benefits does it provide over OPS? They obviously find solace in the OPS's defined benefit component.

There is no doubt that NPS is a fully funded plan in this respect. Sustainability is a concern whenever there are unfunded pension plans. Market forces affect NPS returns. Lack of guaranteed returns may be a problem, but if you have the stamina to ride the market cycle through all the changes, it functions roughly like a plan with guaranteed returns. Since the beginning, the returns have been excellent. For instance, state government programmes have offered returns of 9.4% since their start, while the national government's NPS scheme is currently producing 9.5 percent annual returns.

Are Indians financially prepared for retirement? And is NPS useful?

There is no official old-age income security in the unorganised sector. Employees in the formal sector will have something, although it will vary depending on their wage level. Social Security is required.

Therefore, we must address that.

Second, changes are also occurring in the social structure. Families are dissolving one by one. Joint families used to provide social security, but that is no longer the case. Instead than expecting their children to take care of them, parents believe they should be able to manage on their own (which is where a retirement vehicle like the NPS might help).