Even as the Unified Pension Scheme, which offers assured pension, has failed to gain much traction among government employees, the government is considering bolstering the market-linked National Pension System with additional flexibility and options for the subscribers.
The new options to be available to the NPS subscribers include wealth maximisation, assured benefits with inflation protection, and predictable retirement income through innovative mechanisms such as pension credits.
The current NPS is a transparent, mark-to-market defined contribution pension scheme that emphasises fiscal prudence and is largely focused on the accumulation phase. Thereafter, it mandates at least 405 annuitisation and a maximum 60% lumpsum tax-free payout at the time of retirement at the age of 60.
Addressing NPS predictability gaps
However, it leaves certain key questions unanswered, like the adequacy of the corpus and predictability of retirement income due to factors like market volatility, contribution persistence and investment choices.
Three new schemes for customised retirement income
To address these points, the Pension Fund Regulatory and Development Authority (PFRDA) has floated three schemes: desired pension through a mix of step-up systematic withdrawal plan (SWP) and annuity; desired pension benefit along with periodic inflation adjustment; and providing assured desired pension through pension credits.
The desired pension through a mix of a step-up SWP allows subscribers to define their “desired pension,” with a fixed indicative contribution (IC) that remains unchanged unless the subscriber opts to increase their pension target. It requires a minimum accumulation phase of 20 years, with no upper limit.
The desired pension benefit, along with a periodic inflation adjustment scheme, enables subscribers to define a “target pension,” paid in the first 12 months post-retirement, with annual inflation adjustments based on the Consumer Price Index for Industrial Workers (CPI-IW), capped at a 0% floor for negative inflation scenarios, for the period after the first 12 months.
In the scheme for an assured desired pension through pension credits, each credit guarantees a specified pension per month post-maturity for a fixed period. It requires subscribers to provide inputs on the year of retirement, target pension amount and scheme choice (aggressive: 75% equity; moderate: 50% equity; conservative: 25% equity; debt-focused: mix of corporate bonds and government securities).
The proposed schemes are in addition to PFRDA’s recent move to permit fund managers to customise and offer multiple schemes with equity exposure up to 100% and withdrawal of up to 80% corpus for private-sector NPS subscribers.
The UPS provides an assured pension of 50% of the last drawn salary (average basic pay of the last 12 months of service) upon superannuation for all employees completing a minimum of 25 years of service, with the value of such deferred compensation fully indexed to inflation. Staff are eligible for the pension after turning 60. Besides, there will be assured payouts to the spouse of the pensioner after his/ her demise at 60% of the last pension drawn. Also, all employees with a minimum of 10 years of service will get an assured pension of Rs 10,000 per month.
The government has extended the window for the staff to exercise the UPS option multiple times, and the latest deadline is November 30.