MC Exclusive: Govt-appointed panel will explore how NPS can be improved for its employees: PFRDA Chairman Deepak Mohanty

In an exclusive interview with Moneycontrol’s Preeti Kulkarni, Pension Fund Regulatory and Development Authority (PFRDA) chairman Deepak Mohanty, who assumed charge in March 2023, shared his vision for the NPS ecosystem, plans for a minimum assured returns scheme and the need to start investing early towards retirement to ensure a substantive corpus.

He also shared his views on why NPS can be beneficial for government employees despite not offering an inherent guarantee on returns, unlike the old pension scheme (OPS). Edited excerpts:

It’s been over two months since you took over as the chairman. What are your key areas of focus going to be?

We want to expand the pension coverage, ensure ease of access in terms of digital facilities and widen the intermediary space. Enhancing pension literacy is another item on our agenda. These are the overarching objectives.

How do you aim to make NPS popular with private sector employees? Do you have any targets?

Last financial year, in 2022-23, we crossed the landmark of 10 lakh NPS new subscriber enrollments in the non-government (private) sector. The government sector is on autopilot – employees automatically come into the NPS fold.

Obviously, our focus is the private sector. It has two components – corporate entities and individuals. This year, in 2023-24, our target is 13 lakh. In terms of the Atal Pension Yojana (APY), the subscriber base is at 5.25 crore. In 2022-23, we could do almost 1.2 crore. In 2023-24, we plan to scale up this number to 1.3 crore. We are also increasing our focus on expanding NPS reach through regional rural banks (RRB).

Given the investor-friendly nature of NPS, would you say that it is yet to achieve its full potential?

Absolutely, because overall coverage is quite less compared to the potential. We have onboarded around 13,000 corporates, but the take-up rate by the employees is quite low. In terms of gender, women (subscribers) are fewer in number. And why not NPS for children? You can certainly harness the power of compounding, besides inculcating the habit of savings at a young age. Then, if you look at self-employed professionals, they may be drawing a good income, but they have not really tapped into this particular product (NPS). So given this scenario, the potential is really vast.

Also read: The 25-35 age group accounts for the largest number of NPS subscribers, shows PFRDA report

Any other groups that you are focusing on this year?

Apart from efforts to improve general pension literacy, we are planning to connect with corporates and their human resources (HR) teams to popularise NPS. Normally, the default option is that you go for the (Employees’) Provident Fund. That's the legacy. But in this space, particularly the youngsters do not stick to a particular job. At times, they might not work or pursue something of their own. So here, NPS is a flexible product – it has one unique number called PRAN (Permanent Retirement Account Number) which is portable across jobs and locations. You can invest as a corporate subscriber, and later as an individual and vice-versa. So, we need to increase awareness around the benefits so that it can enthuse people.

While NPS is a low-cost, investor-friendly instrument, which has delivered impressive returns over the years, is the low-cost structure also preventing intermediaries from going all out to promote the scheme? The expense ratio was revised, but is it adequate?

I don't think so. The cost structure was revised (upwards) substantially in 2022. Given NPS’ potential, it is quite viable. At this stage, expense ratio is quite adequate, and it offers a viable proposition. When somebody comes in, they can quickly become profitable. So, it is feasible for them to set aside capital for this business.

The PFRDA had announced its intention to launch a scheme where a minimum assured return is guaranteed. What has been the progress?

The minimum assured return scheme has been in the works for some time. It is very much on our agenda. Our statute also requires that we ought to offer this guarantee. But if someone has to offer a guarantee, then the cost will obviously go up. The pension funds, with low-cost operation, are very thinly capitalised because it's mostly a pass-through vehicle. If you bring in a guarantee, that nature will change. There will be additional capital and solvency requirements, besides the cost of guarantee. So the risk, cost and return need to be balanced. You will have to provide a return which should look attractive to the market. So we are still working on this process and it should fructify, but I cannot give a timeline. We should be able to come up with something in the near future.

PFRDA was also considering offering a systematic withdrawal plan option as an alternative to 40 percent compulsory annuitisation, which will require an amendment to the PFRDA Act. Is this option still on the table?

To offer an alternative to annuity products, we will require an amendment to the statute. We have taken this up with the government. So, that remains a possibility.

But pending that, we have decided to allow the systematic withdrawal plan option for the 60 percent component (NPS subscribers can withdraw up to 60 percent of the corpus at vesting as a tax-free lumpsum, with the balance to be compulsorily converted into annuities). So, someone retiring at age 60 can stay in the system till he/she turns 75. This will be coming very soon, perhaps towards the end of this quarter.

There is a lot of talk about some state governments intending to revert to the old pension scheme. As the PFRDA chairman and member of the finance ministry-instituted committee to review pension schemes for government employees, how do you view these developments?

These are two different structures. In the case of NPS, the essential point is that it’s fully funded. OPS is an unfunded scheme. Globally, we are seeing that there is a movement towards fully-funded pension schemes. So, this is a critical issue from a sustainability point of view. But, having said that, for various reasons, some states want to opt out of NPS. A committee also has been set up. One of the terms of reference is to see how NPS can be further improved for government employees. So, it's too early to comment.

But from government employees' perspective, why do you think they should choose NPS? What are the advantages that it offers over OPS? Because clearly, they find comfort in the defined benefit aspect of OPS…

NPS is a fully-funded scheme, there is no uncertainty in that sense. In the case of unfunded pension schemes, there is always a question of sustainability. NPS returns are market-linked. Lack of assured returns might be a concern, but if you can ride the market cycle with all the fluctuations if you have the staying power, it is more or less like an assured return scheme. Since inception, the returns are quite good. For instance, the central government scheme in NPS is yielding 9.5 percent annual returns, while state government schemes have provided returns of 9.4 percent since inception.

Are Indians ready for retirement, financially? And can NPS help?

In the informal sector, there is no statutory old-age income security. In the case of formal sector employees, they will have something but it varies as per the level of income. They need social security.

So, we need to address that.

Secondly, the social structure is also changing. Families are getting atomised. Earlier, one had the social security of joint families, which is no longer the case. Parents feel that they should be able to manage on their own, instead of asking children to provide for them (so here is where a retirement vehicle like NPS can help).