NPS is a social security scheme which was launched in 2004 for the Government employees and had opened to all sections in 2009. It is regulated by Pension Fund Regulatory and Development Authority (PFRDA) and has emerged as a popular investment scheme aimed at saving for one’s retirement. As on 30 June 2022, the assets under management (AUM) under the NPS architecture had crossed INR 7 Lakh Crores (~INR 7.1 Tn or $95 Bn) with the subscriber base of over 16 Mn. This is quite a feat given the short span of time the scheme has been in existence for, though it should be noted that most of the funds as well as the subscriber base pertains to the Government sector where membership is mandatory for most establishments.
Even though the NPS investment returns have been volatile over the last couple of years, the longer term returns over 5-year and 10-year periods have continued to remain strong. For example, balanced portfolios (1/3 each in Equity, Government bonds, Corporate Debt) have delivered returns exceeding 8% p.a. over the last 5-year period and touching 10% p.a. over the last 10-year period despite the short-term volatility. The annualised returns do vary across fund managers and different asset classes and the detailed performance can be accessed through this website.
The PFRDA is keen on ensuring that the penetration of NPS increases in the private sector as well since the current participation of just 1.6 Mn as on 30 June 2022 feels extremely low. Based on the findings from WTW's State of Retirement Benefits in India Survey 2021-22, while over 60% of employers now offer Corporate NPS on a voluntary basis, the employee participation in the programmes remains around 11%. Further, over a quarter of the corporate participants reported a take up rate of lower than 5%.
Some of the main reasons for employees to not participate in these arrangements continue to be that the plans are voluntary, i.e. their take home pay will reduce in case they opt-in and long lock-in periods applicable for the significant portion of NPS corpus.
Having said this, the PFRDA has been extremely proactive in taking various steps which would make the participation in NPS more attractive for private sector employees. We look at the recent developments in NPS and our thoughts on their potential impact.
1.1 The first change that had been in the making for some time now has been a review of the fees for pension fund management. It was well recognised that an annual fee of 0.01% of AUM would not be sustainable and would eventually need to be reviewed so that the PFMs are able to provide a satisfactory level of service. The revised investment management fee (IMF) as a percentage of assets under management (AUM) effective 1 April 2021 varies across the level of pension funds where the fee for AUM slab over INR 150,000 Cr. is 0.0467% and goes upto the maximum of 0.09% for AUM slab up to INR 10,000 Cr.
These rates of IMF would be reviewed by PFRDA every 5 years. Despite the increase, NPS continues to be one of the most low-cost pension scheme / long-term savings plans globally.
Further the PFRDA has made some changes and additions to the charges of other NPS related services with effect from February 2022. Notable ones are summarised below:
| Type of Charge | Prior Charges | Updated Charges |
|---|---|---|
| Withdrawal / Exit charge | Newly introduced charge | 0.125% of the corpus (min of INR 125 and max of INR 500) |
| Initial and Subsequent Contribution | Upto 0.25% of contribution (min INR 20 and max INR 25,000) | Upto 0.50% of contribution (min INR 30 and max INR 25,000) |
| Initial Subscriber Registration | INR 200 | Minimum of INR 200 and Maximum INR 400 |
| Service Charge of eNPS | 0.1% of contribution (min of INR 15 and max of INR 10,000) | 0.2% of contribution (min of INR 15 and max of INR 10,000) |
| All Non-Financial Transaction | INR 20 | INR 30 |
1.2 The PFMs are now going to have more investment freedom under the equity portfolio as they will be able to invest in the top 200 stocks by market capitalisation as opposed to only the top 100 earlier. This will allow them to demonstrate their investment expertise by being able to invest in the mid-cap stocks as well and potentially increase market share by delivering better returns. The overall impact would be additional investment choice for individual subscribers.
It has also been mentioned that the PFMs will be able to invest in IPOs even though at this stage it is not clear as to what level of funds will be available for this category. As long as this allocation is maintained at manageable levels, it is expected to benefit the individual subscribers as they are more likely to be able to experience the upside an IPO offers within the already diversified portfolio.
1.3 There has also been an increase in the foreign direct investment (FDI) limit in pension fund management to 74% from 49%, which will hopefully attract additional managers leading to more options for subscribers and more competition within the PFMs. Both these aspects are likely to benefit the subscribers.
2.1 Change in lumpsum withdrawal limit:
The limit on the corpus amount for the mandatory annuitisation of 40% of corpus has been raised from INR 2L to INR 5L. This is a good move for the small savers to be able to get the entire tax-exempt lumpsum upfront and not end up with small pension amounts at the retirement age of 60 as this pension may not represent good value for money due to the fixed costs that will need to be factored in by the Annuity Service Providers (ASPs).
Based on current annuity rates, annuitising the revised minimum corpus of INR 2L (=40% of INR 5L) should result in a monthly pension of about INR 1,300. Previously this could have been as low as about INR 500 where INR 80k (=40% of 2L) was to be annuitised.
2.2 Increase in entry age for retired subscribers:
The other big change is the increase in the age at which subscribers are able to join NPS. The age limit has now been raised to 70 years and those who join between 65 to 70 years of age can continue to remain invested till the age of 75 years with a minimum lock-in period of 3 years. In case the subscriber wishes to exit before completion of 3 years, 80% of the corpus will have to be annuitised and only the 20% remaining can be withdrawn in lumpsum. Further to make the NPS more attractive for those joining after 65 years of age, the PFRDA has permitted allocation of funds up to 50% in equity.
In addition, the current subscribers of NPS will also be able to continue in NPS till the age of 70 years by simply notifying the relevant stakeholders 15 days in advance of turning 60.
We feel that this is a bold step in ensuring that the individuals are able to exercise additional flexibility on when they choose to ‘retire’ or start drawing their benefits from the NPS. The PFRDA has also recognised the fact that individuals are living longer and therefore may wish to retire later than before. Providing this additional layer of flexibility is also a plus for the subscribers who can now plan based on their own specific circumstances.
2.3 Steps towards innovation and digitalisation:
The regulator has also taken steps towards a major digital revamp by automating the compliance process. A new digital solution will be implemented in the year 2022 which will speed up the response time through process automation, protect subscriber’s interest and integrate seamlessly with compliance and risk focused supervision.
Further, PFRDA has also allowed Central Record-Keeping Agencies to use the penny drop process to validate and register the active savings bank accounts of the subscribers. This change has been implemented to address the failures / delays faced in crediting the subscribers’ accounts on withdrawal due to various reasons like incorrect or mis-matched bank account details.
The NPS is also in advanced stages of implementing a Minimum Assured Return Scheme (MARS) which will provide a guaranteed minimum return to the subscribers, hence reducing the market risk faced by the risk averse investors. This is expected to be implemented by the end of 2022 calendar year.
In conclusion, it would be fair to say that the PFRDA has been a proactive regulator which has taken bold steps in order to promote the NPS offerings for private sector employees. The steps mentioned above along with the continued strong investment performance are likely to provide additional encouragement for employees to subscribe to NPS.
As part of the 2021 budget update, it was announced that interest income on employee PF contributions in excess of INR 250K per financial year will also be taxed as per the marginal tax rate. Voluntary Provident Fund (VPF) contributions have been fairly popular thus far because of the relatively stable tax-free returns they used to offer. By removing the tax shield from the investment income, the popularity of the VPF, especially among the higher earners is likely to suffer with the NPS well poised as a strong substitute.
We will continue to monitor this space and share details in due course.
