National Pension Fund scheme to see major changes

The Pension Fund Regulatory and Development Authority (PFRDA) will soon introduce key changes to make the National Pension System (NPS) more attractive and to expand its reach across India.

According to a report in Business Today, in the pipeline are the following measures:

1) Raising maximum entry and exit age

Currently, people aged 18 to 65 years can join the NPS. The regulator is considering raising the entry age ceiling to 70 years. The exit age may also be revised to 75 years from the current 70.

"When we hiked the entry age to 65 from 60, more than 15,000 people aged 60-plus subscribed to the NPS. With longevity increasing, it makes sense to hike the maximum entry and exit age to 70 years and 75 years, respectively. These are just enabling conditions—not mandatory," said PFRDA chairman Supratim Bandyopadhyay.

2) Commuting the full amount

At present, NPS subscribers can commute 60% of their investment after retirement, while 40% have to be parked with an insurance company to receive the pension. However, those who accumulate only up to INR200,000 ($2,680) by the retirement age are allowed to withdraw the full amount.

The PFRDA is considering increasing this floor amount from INR200,000 to INR500,000. "This is also an enabling condition. If a subscriber does not want to commute the full amount, they may go ahead with the annuity option," Mr Bandyopadhyay said.

3) Minimum assured return

Since NPS is a market-linked product investing in equities, corporate bonds and government securities, one cannot predict the overall return that may be earned by the retirement age.

Keeping conservative investors in mind, the PFRDA will launch a pension scheme which will offer a minimum assured return to the subscribers. "The pension advisory committee has already given approval to the guaranteed product. Now the actuarial firm will design it. We expect to launch it in the next one or two months," said Mr Bandyopadhyay.

4) Innovative payout options

Currently, subscribers have to park 40% of their NPS funds with one of the 12 insurers empaneled by the NPS. Mr Bandyopadhyay acknowledges that annuity rates have fallen so much that if one opted for return of purchase price option in annuities, the interest rate would vary between 5% and 6%.

"Since annuities are taxable, if you take into account taxes and inflation, you end up making a negative return. This is why we want to offer innovative payout options," he said. The regulator is considering allowing subscribers to retain the 40% with pension fund managers to earn better returns. "We are also looking at a mix of annuity and systemic withdrawal plans. We are getting actuarial firms to look into the viability of it," he said.

5) Widening the distribution network

Currently only institutions can get a distribution licence for pension products. They are called Points of Presence (POP).

"We are expanding the distribution channel. We are exploring whether we can have individuals as our distribution partners. However, we do not have the wherewithal to hire individual PoPs. Existing POPs can recruit them as their sub-entities. In addition, we will soon be rationalising the commission fee for POPs as we did for pension fund managers on fund management fees," said Mr Bandyopadhyay.

Source: Asia Insurance Review