NPS is an attractive product because of its low cost: PFRDA chairman

Deepak Mohanty, chairman, Pension Fund Regulatory and Development Authority.
Deepak Mohanty, chairman, Pension Fund Regulatory and Development Authority.

Summary

Deepak Mohanty, who assumed charge in March, said in an interview with Mint that the SWP option is slated to be rolled out in October.

The National Pension Scheme (NPS) will soon offer its subscribers the option of systematic withdrawal plan (SWP) for the 60% corpus disbursed at the time of retirement instead of the lump sum payment that they usually get, said Deepak Mohanty, chairman, Pension Fund Regulatory and Development Authority. Mohanty, who assumed charge in March, said in an interview with Mint that the SWP option is slated to be rolled out in October. Edited excerpts from the interview:

What is the checklist that you have for your tenure?

The larger focus will be on the NPS sector but since the adoption of pension scheme in the non-government sector is quite low, we want to focus on an all-citizen model. Globally, one of the critical issues faced by elderly people is poverty due to the lack of a sustainable source of income in their old age. Despite the fact that people in advanced countries have access to multiple pensions—state, occupational and private pension—this is still not enough to meet their needs. The challenge in India is bigger because about 90% of the workforce is in the informal sector and do not have access to any kind of statutory old age retirement benefit and are left to fend for themselves. They need a pension and so, the sector needs to grow.

Currently, there are 65 million pension accounts of NPS and Atal Pension Yojana (APY) combined, but the numbers are actually coming from APY: about 52 million accounts. Of the remaining 13 million NPS accounts , 8.5 million are in the government sector, where the pension scheme is on autopilot and so employees necessarily have to come into NPS. Hence, the focus would be on the non-government sector and it will have two components— one is the corporate sector and the other is the all-citizen model which allows any common person to enrol for the pension scheme. One common belief here is that if the head of the family has a pension account, that would suffice for everyone. Even those who can afford one don’t open a pension account for their spouse. But that’s not correct. Everybody needs to have a pension account. There is ample scope for that and we are focusing on it.

Intermediaries earn very low commissions from NPS and so they sell other products more. What is your plan to counter this?

NPS is an attractive product because of its low cost. Having said that, the intermediaries should be reasonably remunerated and hence, the fee structure was reviewed and revised in early 2022. As of now, that is quite adequate.

 

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There has been a slowdown in enrolments in the last couple of months. Is it because of the new tax regime, which allows no benefit for NPS under section 80CCD?

Yes, we saw a dip but that’s because the NPS subscriptions have a seasonality. A section of people who do tax planning during the last quarter of the year come to NPS. The new tax regime is neutral to saving instruments, and, NPS, by its own merit, would also fit the bill in that whole process. So I don’t think removing tax benefit under the new tax regime will slow down the process of NPS enrollment. What was seen in the last few months was temporary and I think we will see reasonable growth now.

Are you thinking of broadening the investment avenues, such as stocks that pension funds can invest in and other products, for example private equity or something similar in nature, that allows longer tenure?

The investment guideline is subject to periodic review and we have reviewed and expanded to 200 companies on the equity side. Our interaction with pension funds doesn’t suggest the need to do any kind of revision at this stage. But we always interact and take a view on the investment pattern. On the debt side, we have given limits on infrastructure bonds and green bonds. We are open to the newer instruments but at the same time, we also do due diligence in terms of the rating and other things that need to be done. In the case of pension, what you see is what you get as it follows mark-to-market accounting on a daily basis. With all the precautions and guidelines, in the short quantity that we offer, we are open to new instruments coming in.

Isn’t it strange that foreign pension money is funding a lot of India’s infrastructure development and even startups, whereas our own pension money is mostly locked up in the largest companies.

I won’t say it’s like that. We can’t say the money is locked in large companies as the bulk of it is in the central government securities. Yes, there is opportunity but the size of the pension fund is not big right now. The corpus that we are sitting on is about 9.65 trillion, which is not a big corpus. In terms of GDP, the NPS corpus would be around 3.5% of the GDP, whereas globally, the pension assets in OECD countries are on an average 80-90%, some even 200% of the GDP. There’s a lot of potential for the pension sector to grow. But currently, the pension sector is quite small and there is adequate space for investment domestically.

The minimum guaranteed plan has been in the works for a long time. Are you facing a dilemma about how to keep the rates competitive and costs low at the same time and also ask PFMs (pension fund Manager) to increase their capital base?

Yes, if somebody is to bring in a guarantee, there is a cost to that. We also have to look for systemic stability because pension funds are essentially pass-through vehicles and hence are thinly capitalized. If they’re taking more risk in terms of giving guarantees, then more capital needs to be brought in. We, then, also need to see that the guaranteed product bucket doesn’t spill over the overall product and we will have to bring in solvency capital. All these things have a cost and, with this, we also have to ensure an attractive return. Currently, we are at this place of balancing the return and risk and hopefully we’ll be able to come up with a solution to the process.

Can people opt for SWP until the 60% lump sum is exhausted and then draw pension from the balance 40%?

Yes, they can do that because annuity can be deferred. Given the annuity rates, people make this comparison— their annuity is low but their pension corpus is giving good returns, so why can’t they stay there for longer. We are facilitating this in a way that people can defer the annuity if they want and draw from the 60% through SWPs. But as things stand now, by 75 years of age. pensioners would have to exit SWPs.

Will the PFRDA Act be amended?

It is under the government’s consideration. One of the suggestions that we have made is to have an alternate pension product. The advantage of this is it will give competition to annuity, which typically has a low yield. So, people can get better rates and would have more choices.

Do you have any wish list for the NPS and old pension system (OPS) committee?

It’s too premature for me to comment on NPS, OPS. NPS is a fully funded scheme, while OPS is a purely pay as you go out of the general revenue kind of scheme and is not financially sustainable. Even the countries that have a defined benefit plan for the public sector employees structure them as contributory schemes. There is hardly any country where it is completely not funded.

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