MC EXCLUSIVE PFRDA says planning inflation-linked NPS products to protect retirees’ returns

PFRDA Chairman Sivasubramanian Ramann

An inflation-indexed pension product under the National Pension System (NPS) may be introduced going forward, Pension Fund Regulatory and Development Authority (PFRDA) chairman Sivasubramanian Ramann has told Moneycontrol, with discussion expected to take around six months, aiming to shield retirees from the ill-effects of inflation eroding their returns, a limitation in the current annuity-based system.

“PFRDA has focused on regulating the accumulation phase, but the payout phase – which follows accumulation – has not received sufficient attention because it relies on annuities. Globally, there has been dissatisfaction with annuities due to the lack of inflation indexing. We aim to bring in more choices and products for payouts in NPS, some of which will provide inflation indexing,” Ramann told Moneycontrol in an exclusive interview.

Currently, under the NPS, at least 40 percent of the retirement corpus must be invested in an annuity, while remaining up to 60 percent can be withdrawn as tax-free lumpsum. An annuity is a financial product providing a subscriber with a regular stream of income, usually for life, in exchange for the accumulated corpus.

Inflation Shield

“Today, the current annuity system does not take care of inflation. The benefit that the Universal Pension Scheme (UPS) is bringing is that it will index payouts on inflation year on year. That is the crucial difference,” Ramann said.

“The UPS is a brilliant scheme because it provides an inflation shield. It will allow retirees to maintain virtually the same standard of living post-retirement as they have now, because inflation erodes savings over time,” he added. “If a similar structure is designed under UPS for the government sector, we should certainly consider implementing it for the rest of the country,” he said.

New Pension Payout Products

The PFRDA has been exploring inflation indexing in pension payouts, a largely unexplored area in India. “Recently, we released a paper exploring the theoretical concepts of how inflation indexing can be incorporated into pension payout products,” Ramann said.

The regulator plans to engage financial institutions to create and test these products out. “We are creating new pension payout products, apart from annuity, which should be inflation-indexed. Certain tax benefits available for annuities will also flow to these new products,” PFRDA chairman said.

The regulator is also creating a sandbox for testing, with some financial firms participating in development. Hoping to work quickly on it,” he added.

The discussion and piloting of these products are expected to take around six months, and the initiative is revenue neutral, with no adverse impact on government finances.

Tax Benefits

The mandatory 40 percent annuity requirement may be adjusted for the new products, while subscribers will continue to receive the same tax benefits as traditional annuities. “There would be a requirement that if 40 percent annuity may become lower, and in place of that pension payout product I should get the same tax benefit as annuity gets as in the Income Tax Act. The same thing can be extended to these products,” Ramann said.

Read More: PFRDA may cut mandatory annuitisation to 20%, allow systematic NPS redemption of up to Rs 12 lakh

100% Equity Option

Separately, PFRDA has launched a 100 percent equity option under NPS on October 1, allowing subscribers to potentially earn higher long-term returns. “Returns from equity have historically been the highest – around 13 percent, the weighted average return under NPS. Previously, there was no NPS product offering 100 percent equity exposure. Returns have ranged between 9 and 13 percent. With the reform, there is flexibility to choose asset classes. For example, if a 25-year-old enters a product with a minimum 15-year vesting period, they could potentially achieve returns of 18–19 percent if equity markets continue on their current trajectory,” Ramann said.

Read More: NPS opens full equity option, FM flags inflation protection

What is an annuity in NPS?

An annuity provides a subscriber with a regular stream of income, usually for life, in exchange for the accumulated corpus. Under NPS, at least 40 percent of the retirement corpus must be invested in an annuity, while the remaining up to 60 percent can be withdrawn as a tax-free lump sum.

Why is inflation indexing needed?
The current annuity portion does not adjust for inflation, which reduces the purchasing power of retirees over time. Inflation-indexed payouts increase year-on-year, helping retirees maintain their standard of living post-retirement.

How long will it take to introduce these products?
PFRDA expects discussions and piloting to take around six months.

Will the 40% annuity requirement change?
Possibly. The 40 percent requirement may become lower for new products, but subscribers will still receive the same tax benefits as traditional annuities.

What role will financial firms play?
Financial firms will participate in a sandbox to design, test, and develop inflation-indexed pension products.

What about the 100% equity option?
This option allows subscribers to invest fully in equities for higher potential long-term returns. It complements the new inflation-indexed payouts and provides greater flexibility in asset allocation.