NEW DELHI: Amid the ongoing debate over National Pension System (NPS) and the Old Pension System(OPS), and states pulling out of the NPS, state government employees’ assets under management (AUM) in NPS went up by 25% in 2022-23.
Chairman of the Pension Fund Regulatory and Development Authority (PFRDA) Deepak Mohanty in an interaction with TNIE said that the number of state government employees in NPS also went up by 9% in FY23.
Though refusing to get drawn into the NPS versus OPS debate, PFRDA chairman did say that defined benefit plans like the OPS are not sustainable in the long run. He says that globally there is a move towards fully-funded schemes, and even if some countries may have defined benefit plans, they are funded largely through payroll taxes.
NPS could be as good as OPS
The chairman of the NPS regulator said NPS could offer similar monthly payouts as the old pension system. “Under the old pension system, you get 50% of your last drawn pay. If the accumulation under NPS is for a reasonable period, say around 30 years, our assessment is that if you annuitise the full corpus at the time of retirement, you can almost get around 50% of the last drawn salary,” says Mohanty, who took over the reins of PFRDA in March this year.
With several state governments implementing the old pension system, there has been a raging debate over the sustainability of such a move. Under the OPS, the pension corpus is funded by the employer (in case of government employees, government funds the corpus). The employee gets 50% of the last withdrawn salary plus dearness allowance as pension. The DA is revised every two years.
The PFRDA chairman admitted that NPS cannot offer the indexation benefit, that is revision of pension amount to adjust for inflation. However, Mohanty says with the kind of returns that NPS has generated in the last 14 years (since NPS was opened for the private sector), it remains a very competitive pension product in the market.
“NPS as a scheme is very attractive because it has generated competitive returns. So, if you look at the NPS equity scheme, it has given 12% CAGR over 14 years. The scheme for central government employees has generated 9.4%, and that for the state governments - 9.3% over 14 years. Compared with any benchmark in the market, these are highly competitive returns,” reiterates the chairman.
Need for awareness about NPS
However, the chairman rues the fact that there is severe lack of awareness about retirement saving in general and NPS and its benefits in particular. “Nobody thinks about retirement, nobody wants to get old – that is the unfortunate part. And once you delay it, it could be too late. Ultimately it is the power of compounding (that helps you build a large retirement corpus). Start young, put in a little amount and that grows into a huge corpus, and you get a decent pension,” says Mohanty.
He feels there is a need to nurture the idea of retirement savings, and that the PFRDA as a regulator is planning to do so. It wants to engage more with corporates and their HR departments, trade bodies, etc.
While PFRDA is working on creating awareness about NPS, it also expects the fund managers and intermediaries to do so.
Mohanty informed TNIE that it has brought in retirement planners, who are imparting knowledge through regular awareness camps. The pension regulator has also allowed agents to sell NPS schemes so that it can reach more people.
“General pension literacy should also improve. Those who can afford must know that one (pension) scheme is not enough. If one thinks that one has EPF and that will see him/her through, that is not the case,” says Mohanty, adding that people need to have access to multiple social security or old age income schemes.
Untapped market
The PFRDA chairman says there is a lot of untapped market for NPS. This scheme was started with government officials and now it is open for all. He feels that going forward, the growth in NPS will be driven by the private sector – individuals and corporates.
“We see from the NPS data there is gender imbalance partly because more men are in formal employment than women. The question is, those who can afford why not give it to the spouse. The threshold is also so low that with Rs 1,000 (a year) one can open an NPS account,” he says.
He also says that uptake among youngsters is low partly because they go for employee provident fund (EPF) as the default option.
NPS has generated competitive returns
Chairman of PFRDA Deepak Mohanty said globally there is a move towards fully-funded schemes, and even if some countries may have defined benefit plans, they are funded largely through payroll taxes. NPS as a scheme is very attractive because it has generated competitive returns. The scheme for central government employees has generated 9.4%.