Pension system in India: Can NPS fill the void? : The Tribune India

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Pension system in India: Can NPS fill the void?

Ageing is an inevitable fact of life. To enjoy the November of one’s life and live with pride, financial stability and security are essential.

Pension system in India:  Can NPS fill the void?


Dr VK Vijayakumar

Ageing is an inevitable fact of life. To enjoy the November of one’s life and live with pride, financial stability and security are essential. Developed countries have a universal pension system that takes care of the elderly. Many rich countries have ‘cradle to grave’ social security systems, including old-age pension. But developing countries such as India do not have such a universal pension system. This makes the lives of millions of people difficult during old age.

At present, world life expectancy is 65. According to the United Nations, this is expected to cross 75 by 2050. In India, life expectancy has improved from 32 at the time of independence to 65 at present and is expected to increase steadily. In some states such as Kerala, life expectancy is already 73. In this environment of rising life expectancy, post-retirement years in the life of a person will rise steadily.  This, along with rising cost of living and expanding aspirations render pension absolutely necessary. In India only 7% of the workforce works in the organised sector. Only this minority enjoys pension benefits.

Government employees get pension. The pension system run by the EPFO, though not very significant, benefits only those coming under the scheme. A vast majority of people in the unorganised sector lie outside the present pension scheme. Some state governments are giving pension to agricultural labourers, marginal farmers and similar marginalised sections of society. But these are grossly inadequate compared to the need.

The National Pension System (NPS) was launched to bridge this gap. NPS was launched on January 1, 2004 with the objective of providing retirement income to all citizens. Initially, it was introduced for the government employees, except the armed forces, joining government service on or after January 1, 2004. On May 1, 2009, the NPS was opened to all citizens who can join the scheme on a voluntary basis.

The pension sector is regulated by the Pension Fund Regulatory Authority (PFRDA). The PFRDA has authorised 58 institutions, including public sector banks, private banks, and private financial institutions as Points of Presence (PoPs) for opening the NPS accounts of the citizens.

Under the NPS investment guidelines, pension fund managers manage three separate schemes, each investing in different asset classes. The three asset classes are equity (E), government securities (G) and credit risk-bearing fixed income instruments (C).

  • E Class: Here the investment is mainly in equity. The fund managers invest in Index funds that replicate the portfolio of either BSE Sensex or NSE Nifty 50.
  • G Class: Investment in government securities like GOI bonds and state government bonds.
  • C Class: Investment in fixed-income securities with credit risk, that is, securities other than government securities.

The subscriber has the option to decide as to how the money is to be invested in the three asset classes.  If the subscriber does not exercise any option, the contribution will be invested in accordance with the ‘Auto choice’ option. This option has a pre-defined portfolio, wherein, at the lowest age of entry of 18 years, the allocation will be 50% in E, 30% in C and 20% in G class. This ratio will be applicable till 36 years of age. From 36 onwards, the weight in ‘E’ and ‘C’ asset classes decreases and the weight in ‘G’ class increases annually till it reaches 10% in ‘E’, 10% in ‘C’ and 80% in ‘G’  at 55 years of age. On exiting from the scheme at 60 years, the subscriber can withdraw 60% of the amount as lump sum and the balance 40% should be invested in life annuity schemes which will serve as pension. The auto choice option is based on the time tested fact that though risky in the short run, equities beat all other asset classes in the long run. Joining the NPS will be a rewarding and safeguarding experience to subscribers.

The author is Investment Strategist, Geojit BNP Paribas. The views expressed in this article are his own

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