Given the purpose of pensions is to provide for old age security, it is not clear why the government is forcing people into sub-optimal solutions; nor is it clear why the rules are different for different categories of people. So, right now, there are those covered by the EPFO where the subscribers have zero choice in how their money is to be invested; till July 2015, in fact, none of this could be invested in equity markets, though 15% of the incremental corpus can now be invested in markets, but only in index funds. There are then those covered by the National Pension System (NPS), but in this case too, there are two categories—those who are employed in the private sector and those employed by the government. Private sector people in NPS can choose between seven pension fund managers while those employed by the government only get to choose between three, all of whom are public sector—LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions. Private sector subscribers to NPS also get to invest up to 75% of their equity in the stock market—the initial default option has a 50% cap, and this goes up to 75% in the Aggressive Life Cycle Fund and down to 25% in the Conservative Life Cycle Fund. In the case of bureaucrats, however, the equity limit has been fixed at a much lower 15%—so, though bureaucrats account for nearly 88% of the entire assets of the NPS, they have the least options.
These different rules cap the ultimate pension various categories of subscribers can hope to get. In the case of EPFO, while there is a pension component for those who earn under Rs 15,000, the returns have been much lower—over the last 5 years, they have averaged 8.7%. In the case of NPS, returns for government employees have averaged 11% over the same period. In the case of the private sector, naturally, the returns vary depending upon the type of securities chosen for investment. Those who chose to invest equity earned an average of 14.6% per annum and this was a lower 11.3% for those who invested in corporate debt and 10.8% in G-Secs. Apart from the need to allow bureaucrats more flexibility in their investments—the pension fund regulator has, once again, written to the government asking for permission to hike the equity component to 50%—there is also the need to allow people to migrate from EPFO to NPS where the returns are higher. Despite the promise to allow this in his FY16 budget, finance minister Arun Jaitley has not been able to ensure this happened. While the NPS has higher returns, the scheme’s design that forces subscribers to convert a part of their maturity corpus into annuities is a bad one since annuities offer poor returns—that, too, needs to be addressed.