NPS vs EPFO: Demystifying the pension debate

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SummaryComparing NPS with EPS, to use an often used cliché, is like comparing an apple to an orange. EPF returns remain unaffected by market fluctuations, while the NAVs under NPS schemes fluctuate both ways

till date and returns are accumulated in the members’ account. The basic difference here is: (1) in the manner of fund accumulation and (2) in the manner the accumulated funds are paid out.

In case of NPS the fresh investments are used to purchase units as per the existing NAV, while in case of EPF the entire sum is invested and the portfolio is held-to-maturity (HTM), and the interests actually received is credited to the members’ account. As such, the returns on EPF are actual returns which remain unaffected by market fluctuations, while in case of NPS the mark-to-market portfolio valuations (MTM) make net asset value (NAV) fluctuate both ways.

The returns are only notional; nothing tangible is getting credited to the members’ account. This means that in the year when the financial markets do not perform and that being your retirement year, NAV could be substantially low, possibly eroding most of your lifetime savings.

This is important as ‘security’, by definition, means something a person can bank on. Can you in a social security scheme brush under the carpet a possibility when a lifetime of earnings can be eroded if markets turn bearish the very year your retirement is due?

In NPS a minimum of 40% of the final pot on retirement is utilised to purchase annuity, while the rest is returned as a lump sum. In case of EPF, on retirement the entire corpus is returned to the member. EPF, however, also allows partial withdrawals during the service period for meeting social obligations as well as for certain exigencies during rainy days.

Benefits under EPS spread far beyond what the member has contributed. Under EPS, lifelong pension is available to the widow and children up to the age of 25 years even if the member has only contributed only for a single month. It is unlikely that the range of benefits offered under EPS is available under any other scheme and EPS with such kind of benefits cannot be compared with pure market-linked annuity scheme.

There is a prevailing notion in the media that the returns in EPF/EPS are low compared to NPS and other market-oriented SIP schemes. This, no doubt, stems from the conventional wisdom that investment in equity market outperforms other investment avenues in the long run. However, a dispassionate analysis of the returns actually achieved by EPFO would show that it fares rather competitively with the returns under NPS and even

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