Most of the people in India have to create their own retirement corpus in absence of social security system in the country. We need a robust system which can provide decent returns to meet old age security. New Pension System was supposed to do this but has failed. By making NPS more flexible, the government can take right step in this direction

The National Pension System (NPS) was started with an objective to provide a pension solution to government employees after the central government decided to do away with pension facility to these employees. Initially started as a scheme for government employees, it was opened for all individuals. More than three years have passed since this system was opened to general public, however, it has failed to generate the kind of participation from individual investors that it should have. Though the blame is put on lack of adequate marketing and positioning of the scheme among corporates, there are certain changes in the NPS which can definitely make it more attractive. Here are three changes which can make the pension scheme more attractive for potential subscribers of the scheme. Let us look at these three changes:
 

Changes in Investment choice:  Individuals opting for NPS have two choices of making investments which are called as active choice and auto choice. Under both the choices, an individual can invest in:
 

Asset Class E - investments in predominantly equity market instruments.
 

Asset Class C- investments in fixed income instruments other than government securities.
 

Asset Class G - investments in government securities
 

It is surprising that there is a cap of 50% on investment into Asset class ’E’ for all age groups starting from the age of 18. People in the age group below 35 years should be given a choice to deploy higher percentage of contribution in equities as their risk appetite is generally high. Coupled with this is the fact that people in younger age groups have more time which can help investments made by them overcome challenges related to vagaries of return in the stock market. Also, there should be a flexibility given to individuals to reallocate funds subject to some charges.
 

Know more: What ails the New Pension Scheme?
 

Broaden the scope of vesting choice:  As per the current vesting criteria, any individual who decides to withdraw pension wealth before the age of 60, can withdraw maximum of 20% of such wealth and remaining 80% has to be invested in a life annuity with any IRDA (Insurance Regulatory and Development Authority) regulated insurance company. The details are given in the table below for other types of withdrawal.
 

Why should there be a limitation of investments with IRDA-regulated life insurance companies only? The returns offered by these companies on annuity schemes are not great anyways. Why not include other entities like banks and post offices which currently offer monthly return plans for investors. These entities are also regulated by the government and will offer more choices to the investors.

Change in investment guidelines:  As per PFRDA (Pension Fund Regulatory and Development Authority) guidelines on investment under NPS, there is a limitation put on the equity shares in which investment can be made. The guideline says, “The investment in this asset class would be subject to a cap of 50%. This asset class will be invested in index funds that replicate the portfolio of either BSE Sensex or NSE Nifty 50 index. These schemes invest in securities in the same weightage comprising an index”. It is true that the companies forming part of Sensex and Nifty are probably the best companies in terms of track record, corporate governance and historical performance. However, by limiting the investment scope in these companies, there is an indirect cap put on the growth potential of equity part of investment. The investment guidelines should be broadened to include at least top 100 companies (aligning this with appropriate index) so that investors could benefit from growth of these companies.
 

It is an open secret that most of the people in India have to create their own retirement corpus in absence of social security system in the country. Need of the hour is to create a robust system which can provide decent returns to meet old age security. By making NPS more flexible, the government can take right step in the right direction.
 

To read more articles by Vivek Sharma, please click here.
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)