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NPS needs to be made flexible to make it more attractive

There should be a minimum return guarantee in NPS. Once it is being fixed by the government, we can find more investment in this particular scheme

December 24, 2012 4:30 IST | India Infoline News Service
To provide old age income, PFRDA (Pension Fund Regulatory and Development Authority) introduced National Pension System (NPS). NPS is a pension plan where you can invest during your working years and withdraw when you retire. An online facility, NPS provides a subscriber access to two personal accounts: Tier-I pension account & Tier-II savings account.

In Tier-I pension account, you will contribute your savings for retirement into this non-withdrawal account. Tier-II savings account is simply a voluntary savings facility. You will be free to withdraw your savings from this account whenever you wish. A low-cost retirement solution, NPS can turn our retirement savings into a sizeable kitty.

NPS was launched by government of India for central and state government employees in 2004, as they shifted from a ‘defined benefit system’ to a ‘defined contribution system’ under the pension system in India. This is mandatory for all post 2004 government employees. NPS was then made available to every Indian citizen from 1 April 2009 on a voluntary basis. More than three years have passed since NPS has been introduced. However, the scheme has failed to attract retail investors. Some of the reasons which have led to the failure of the scheme include: Lack of adequate marketing, positioning of the scheme among corporates, no minimum guarantee, etc.

The scheme needs to be made flexible to make it more attractive. Individuals opting for NPS have two choices of making investments which are called as active choice and auto choice. Under both the choices, an individual can invest in:  

Asset Class E (equity market instruments) will invest in index funds such as BSE Sensitive and NSE Nifty 50 Index. The investment can be made up to 50% of the amount accumulated in the account.

Asset Class G will invest in central government and state government bonds. The investment can be made up to 100% of the amount accumulated in the account.

Asset Class C includes corporate debt, liquid funds of AMCs regulated by SEBI, fixed deposits of scheduled commercial banks, debt securities and credit rated infrastructure bonds. The investment can be made up to 100% of the amount accumulated in the account.

The Auto Choice option helps you to divide your money among equity, government debt and corporate debt-based on proportions defined by PFRDA. However, Asset Class ‘E’ has a limit of 50% for investment in equity for all age groups starting from the age of 18. People below 35 years of age should be given a choice to invest higher percentage of contribution in equities as their risk appetite is usually high. People in younger age groups have more a longer time to adjust to the unexpected return in the stock market. 

At the end of the tenure (retirement), up to 60% of the corpus can be withdrawn from NPS and the remaining 40% will be invested in an annuity provided by insurance companies. If you want to withdraw before 60 years of age, you would be required to invest at least 80% of the pension wealth to purchase a life annuity from any IRDA–regulated life insurance company. The remaining 20% of the pension wealth may be withdrawn as lump sum. Pension will be given to the subscriber on a monthly basis based on annuity scheme chosen at the time of retirement.

Investors have a limitation of investments with IRDA-regulated life insurers only. There should be more options available to the investors such as banks and post offices which currently offer monthly return plans for investors. These institutions are also regulated by the government and will offer more choices to the investors.

No fixed rate of return from NPS and returns from other avenues being comparatively better than NPS is also another reason because of which there has been less of retail participation. There should be a minimum return guarantee in NPS. Once it is being fixed by the government, we can find more investment in this particular scheme.




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