Good News for NPS subscribers! Minimum assured return on the anvil from PFRDA

By: | Updated: February 18, 2019 12:32 PM

NPS was initially conceived as a contributory pension scheme for Central government employees, replacing the erstwhile defined benefit (DB) scheme.

National Pension System, NPS, (PFRDA), Minimum Assured Return Scheme (MARS), nps fund performanceCurrently, the returns in NPS are linked to the performance of the underlying securities such as equity, debt or a mix of both.

Subscribers of the National Pension System (NPS) may soon get the discretion to choose the fund option that comes with a minimum assured return. Currently, the returns in NPS are linked to the performance of the underlying securities such as equity, debt or a mix of both.

The Pension Fund Regulatory and Development Authority (PFRDA) has invited an Expression of Interest from leading Actuarial firms for designing and development of a Minimum Assured Return Scheme (MARS) for NPS subscribers. The firms have been asked to design, develop and recommend a minimum assured return scheme that can be implemented under the NPS architecture.

Will guarantee make NPS a defined benefit scheme

NPS was initially conceived as a contributory pension scheme for Central government employees, replacing the erstwhile defined benefit (DB) scheme w.e.f 01.01.04. Now NPS (defined contribution) caters to all the citizens of India, from the year 2009. Going forward, under MARS, the nature of the returns may not be a fixed return, instead it will be a minimum return over a specific period. Any shortfall will be made good by the sponsor of the scheme. If a fixed return is guaranteed, then it takes some features of the DB scheme, but is not a DB scheme completely.

Even if MARS gets implemented, there may be a guarantee reset period (Quarterly / half yearly /annual) or any other time period that is recommended and that strikes a balance between subscriber interest and the Pension Funds who need to offer such a product.

The PFRDA Act 2013 clearly states that there shall not be any implicit or explicit assurance of benefits except market-based guarantee mechanism to be purchased by the subscriber.

Challenges

The major difference between the government subscribers and other subscribers i.e. under the All Citizens model is that all citizens are not entitled to any contribution of 10 per cent of salary ( enhanced to 14 per cent recently) which is available to employees of government and corporates. What kind of lock in for the MARS would be appropriate (5/7/10 years) keeping in view of the peculiarities of the various government sector subscribers, if a lock in period is required remains to be seen.

Further, under MARS, the recommended scenarios for investment mix (short term, long term and others with bifurcation of money market instruments, G-sec, Corporate debt and equity) will have to carefully established. Also, the quantum of fee or the guarantee charge recommended for the MARS needs to be designed.

Current structure of fund options

Presently, in NPS, there are five pension fund managers (PFMs,) two investment options (Auto or Active) and four Asset Classes. The Subscriber first selects the PFM, and post selection of PFM, subscriber has an option to select any one of the Investment Options.

There are four Asset Classes (Equity, Corporate debt, Government Bonds and Alternative Investment Funds) from which the allocation is to be specified under single PFM.
Asset class E -Equity and related instruments
Asset class C -Corporate debt and related instruments
Asset class G -Government Bonds and related instruments
Asset Class A -Alternative Investment Funds

NPS Scheme- E (Tier-I) 5-Year CAGR returns : (As on January 31, 2019)

The NPS fund performance depends on the performance of the underlying asset classes.

SBI PF: 13.25%
LIC PF: 11.44%
UTIRSL: 13.59%
ICICI PF: 12.87%
RELIANCE PF: 12.38%
KOTAK PF: 12.92%
HDFC PF: 13.60
BIRLA PF: Not Applicable

Conclusion

Guarantees always come with a cost. Further, in order to provide guarantees, the fund managers need to employ strategies that may not be able to utilise the full potential of equities, which have shown to generate high inflation-adjusted return over the long term than other asset classes. MARS may help to set a floor for the value of savings of the subscribers but may fall short of generating a corpus adequate enough to supplement retirement needs. Ultra conservative investors may, however, find solace under MARS.

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