National Pension System: Government Tweaks & its impact

GOVERNANCE/ ECONOMY

Topic:

• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• GS-3: Indian Economy and issues relating to planning, mobilization, of resources

National Pension System: Government Tweaks & its impact

Context: Given the dominance of informal employment in India, the Employees’ Provident Fund Organisation, which is contingent on a formal employer-employee relationship, only covers a fraction of the workforce.

About New Pension Scheme

• Started as the New Pension Scheme for government employees in 2004 under a new regulator called the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension System (NPS) has been open for individuals from all walks of life to participate and build a retirement nest-egg
• The NPS has been gradually growing in size and now manages ₹5.78 lakh crore of savings and 4.24 crore accounts in multiple savings schemes. 
• Of these, over 3.02 crore accounts are part of the Atal Pension Yojana (APY), a government-backed scheme for workers in the unorganised sector that assures a fixed pension payout after retirement.
• The rest constitute voluntary savings from private sector employees and self-employed individuals, for whom some significant changes are on the anvil.

What overhaul is the PFRDA planning?

• Annuitisation of Savings: The law regulating the NPS allows members to withdraw just 60% of their accumulated savings at the time of retirement. With the remaining 40%, it is mandatory to buy an annuity product that provides a fixed monthly income to retirees till their demise. 
• Exemption to annuitisation: Members who accumulate up to ₹2 lakh in their NPS account at the time of retirement are exempted from the mandatory annuitisation, and can withdraw the full amount.
• Proposal for New Exemption Limit: Recently, PFRDA chairman said this limit will soon be revised to ₹5 lakh. 
• Suppose somebody reached ₹2.1 lakh at retirement, he will get an annuity component of ₹84,000 (40% of corpus), which, today, will give an income of ₹400 or ₹450 a month. So, now, PFRDA will allow those with savings up to ₹5 lakh to take the entire corpus out if they choose
• More Flexibility: PFRDA has now proposed to give members a choice to retain 40% of their corpus with the NPS fund managers even after retirement. This, the PFRDA chief believes, will allow them to get better returns, and these savings can be paid out to members over 15 years through something like the systematic withdrawal plan offered by mutual funds. 
• Relaxation in age norms: Age restrictions to join the NPS are also being eased to allow people to join the scheme up to the age of 70 years, from 65 years earlier. 
• Additional Fund Managers: At least three more fund managers are expected to be appointed soon, which will take the total managers to ten. 
• While this change shall need Parliament’s nod, the expansion of the annuity-free withdrawal limit from ₹2 lakh to ₹5 lakh is being done immediately

What prompted this rethink?

• Complaints from NPS Subscribers: Falling interest rates and poor returns offered by annuity products had triggered complaints from some members and experts about the compulsory annuitisation clause. 
• Poor returns: Since annuities are taxable, deducting the tax and factoring in the inflation means annuities are yielding negative returns. With retail inflation running at about 5%-6% over the past year, the returns on annuities are, in fact, negative, even if one does not factor in the tax. 

What is the impact of changes being made?

• To avoid forcing people into such an unattractive investment, the regulator has tweaked its rules so as to allow better returns to its pension subscribers.
• The flexibility of the pension system will enable more people to invest in NPS as it will be considered as safe & risk free return on their savings.
• Appointment of additional fund managers shows that government is serious about expanding the user base of NPS and make it more attractive to them through efficient utilization of funds.