Amidst the clamour by government employees in some States to revert to the old pension scheme, it is good to see the market-linked National Pension System (NPS) gain popularity among private sector employees. A report in this newspaper based on latest data from the Pension Fund Regulatory and Development Authority (PFRDA) shows that the corporate and all citizens models of the NPS — voluntary channels which are open to private sector employees — have seen strong growth in assets managed and subscriber count in the past year.
While the NPS corporate model saw a 33 per cent expansion in assets to ₹1.14-lakh crore, the all-citizens model saw a 34 per cent growth to ₹40,722 crore. Subscriber growth for the two models was at 21 per cent and 34 per cent, respectively. If one includes the assets managed on behalf of Central and State government employees, the two-decades old NPS now manages over ₹8.75-lakh crore for a 6.1 crore subscriber base, which is creditable compared to the ₹11-lakh crore managed by the Employees Provident Fund (EPF) for about 26 crore legacy subscribers.
Initially, Section 80C tax breaks played a role in nudging private sector employees to the NPS. But the scheme has now begun to gain favour on its own merits. With the EPF accessible only to organised sector employees, there was a felt need for a retirement vehicle that met the needs of unorganised sector workers and the self-employed. The NPS has met that with a flexible structure that allows the employee to contribute as little as ₹1,000 a year, transparent design that allows him the choice of assets and fund managers and a low cost structure. It has also done a good job of busting the myth that market-linked vehicles can never match the performance of guaranteed return schemes. NPS’s private managers have delivered ten-year returns of 12-13 per cent on equity plans and 8-9 per cent on debt, which comfortably beat both inflation and the EPF’s fixed returns.
With young investors showing a preference for market-linked investments over fixed return vehicles, the time is opportune for the Centre and PFRDA to promote NPS as the go-to retirement vehicle. Three policy nudges may help. One, despite electronic subscription and auto-debit features, NPS’ onboarding and transaction process remains complicated. Expanding NPS’ availability beyond traditional banking and broker channels to new-age fintech platforms may help overcome this and attract young subscribers. Two, flexibility is a key attribute that young investors look for in their investment avenues. While NPS is flexible on subscriptions, the rule that 40 per cent of the employee’s final maturity proceeds be converted into annuities is rigid and needs review. Finally, as the government tries to transition taxpayers to a new exemption-free income tax regime, it is essential that the NPS too be marketed without tax props. Allowing all organised sector employees the option of choosing between EPF and NPS for their statutory contribution may give a boost to the latter.