Proposal to change in National Pension System (NPS)

Context

The changes has been proposed for NPS to a clamour for a guaranteed return product for large sections of potential investors with a high aversion to risk.

About the NPS

• It was started as the New Pension Scheme for government employees in 2004.
• It started 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 even to cover the informal sector also.
• The already existing 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 ?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.
• Now, 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.
• 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.
• 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.

Other changes

• An actuary is being appointed to suggest the design for such a product and the PFRDA hopes to launch its first guaranteed product.
• 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.