The Pension Fund Regulatory and Development Authority has set up a committee to draft guidelines for assured payout options under the National Pension System for non-government subscribers. While such an option will address income uncertainty for retirees, this will come at a cost, explains Saikat Neogi
Panel on assured payouts under NPS
The expert committee headed by M S Sahoo, founder of Dr Sahoo Regulatory Chambers and former chairperson of Insolvency and Bankruptcy Board of India, will review mechanisms for a smooth transition from the accumulation phase to the payout phase and create regulations for assured pension payouts.
The panel will look into operational design, such as defining lock-in periods, withdrawal limits, pricing mechanism and fee structure for National Pension System (NPS) providers. In September 2025, the pension regulator came out with a consultation paper for three different payout schemes — flexible, assured, and predictable pension schemes.
For the first, it proposed a non-assured scheme focused on maximising pension wealth through a mix of a step-up systematic withdrawal plan and annuity. For the second option, it proposed an assured scheme providing a target pension with periodic inflation adjustments, and for the third, pension credits where each credit assures fixed monthly pension payouts in the decumulation phase to the subscriber.
Why NPS subscribers want guaranteed amounts
Assured benefit schemes are essential in a developing economy facing rising longevity risks. The NPS structure is a mark-to-market defined contribution pension scheme largely focused on the accumulation phase. Thus, questions arise about corpus adequacy and predictability of retirement income due to market volatility, contribution persistency and investment choices.
Assured payouts will offer greater predictability to non-gover-ment NPS subscribers, akin to that of Atal Pension Yojana (APY) or Unified Pension Scheme (UPS) for government employees. It will bring in defined benefit characteristics into a defined contribution system. For assured payouts, phased annuitisation or a hybrid option that balances market-linked growth of the corpus and income stability would help subscribers create wealth and get a regular cash flow.
How this happens in UPS, APY
For central government staff, UPS provides an assured pension of 50% of the last drawn salary (average basic pay of the last 12 months of service) upon superannuation and completing at least of 25 years of service. There are assured payouts to the spouse of the pensioner after his/ her demise at 60% of the last pension drawn.
Moreover, all employees with at least 10 years of service will get an assured pension of 10,000 per month. However, the scheme has failed to gain much traction as only 1.3 lakh of the total 22 lakh government employees, or just 6%, have opted for it. In APY, which is a voluntary, periodic contribution-based pension system, a subscriber gets a guaranteed minimum pension of1,000-5,000 per month after the age of 60 years until death.
After the subscriber’s demise, the spouse receives the same pension amount till his/her death. After the demise of both, the nominee gets the pension wealth — the money accumulated in the account of the subscriber till the age of 60 years.
Low annuity rates in NPS
On retirement, subscribers have to invest 40% of the corpus in annuities. The pension depends on the annuity rates prevailing at that time and the accumulated corpus. Life insurers offer five types of annuity plans; however, annuity rates are low in India, ranging between 5.5% to 7% depending on the annuity plan selected and the annuity provider.
That has kept away private sector employees — the annual rise in non-government subscribers has hovered around 16% for the last three financial years. It was 15.8% in FY24, 16.8% in FY25 and 16.5% in FY26 (till December data).
However, PFRDA has recently reduced the mandatory annuity requirement from 40% to 20% for non-government employees. This will provide greater flexibility for those who may prefer managing their own investments rather than being locked into fixed annuity rates.
Allowing individuals to retain a larger share of their corpus will give them the freedom to design retirement income strategies based on their personal needs.
Challenges in fixed pension
Assured payouts will come at a cost for subscribers, as such products often involve lower upside potential and longer lock-ins. The pension scheme offering assured payouts will utilise the balanced life cycle investment patterns during the accumulation phase and may employ held-to-maturity valuation to insulate the portfolio from external market events and use liability-driven investment strategies during decumulation to manage risks.
The scheme will face risks such as investment volatility, potential underfunding due to economic conditions, inflation, and longevity. Mitigation strategies would include liability-driven investment approaches, where bond portfolio durations are aligned with liability duration based on interest rate expectations.
Hedging instruments can also be employed here. The pension regulator’s consultation has underlined that adequate capital strength will be needed to support assured payouts, with potential sponsor contributions in case of adverse conditions.