NPS to include assured returns; new products likely to come in August

Amid a debate on the pension systems, old and new, the sector regulator is likely to allow minimum assured-return products around August. The Pension Fund Regulatory and Development Authority (PFRDA) has appointed E&Y Actuarial Services LLP to design the scheme under the New Pension Scheme (NPS).

“Lots of actuarial inputs are required. The consultant will design the product and it will help us in launching it,” PFRDA Chairman Supratim Bandyopadhyay told Business Standard.

The PFRDA Act talks of putting in place minimum assured-return schemes but they have not been launched yet despite more than eight years having elapsed since the legislation was enacted in 2013 and before that the NPS was in place under an interim pension regulator since January 1, 2004. The Act talked about having these products by the end of 2013-14. 

“The pension fund regulator will finalise a guaranteed product, which will assure minimum returns by the end of this financial year (2013-14),” the Act says.

The Comptroller and Auditor General of India (CAG) had criticised the PFRDA for not rolling out such products in compliance with the PFRDA Act. It is not difficult to understand why this is so. Earlier, the PFRDA chairman had said such schemes in insurance and mutual funds had not done well.

“Guaranteed products in the insurance sector were withdrawn because it was felt that giving guarantees for a long period may not be in the interests of the organisation. Sebi (Securities and Exchange Board of India) too does not encourage any guaranteed product,” Bandyopadhyay had said. He had said the moment a guarantee was given, capital adequacy requirements for fund managers went up.

“It is mark-to-market. We are not facing any investment risks. But the moment you give guarantees and the markets move down, fund managers will have to bring in additional capital. So, actuarial inputs are necessary. Not only capital requirements, there are going to be different charge structures, and there has to be a separate guarantee fee. We have to decide what the ideal guarantee fee should be,” the regulator had said.

The Centre had introduced the NPS mandatorily for its new employees from January 1, 2004, and subsequently, all the states except West Bengal have adopted the NPS for their employees.

However, the Rajasthan government in its latest Budget announced reverting to the old pension scheme for its employees from the next financial year. It said its decision was on account of the insecurity the NPS created among employees.

The pensioner gets assured benefits under the OPS, usually 50 per cent of his last-drawn basic salary and dearness relief, which is adjusted every six months in line with inflation. There are no assured benefits but defined contributions in the NPS. Minimum assured-return schemes try to fill this gap in the NPS to an extent.

Such schemes assure fixed returns in percentage terms and hence have some features of a defined-benefit scheme. Under it only the floor is set. Actual returns depend on the markets. Any shortfall is to be made good by the sponsor and the surplus is to be credited to the subscriber’s account.

The NPS has offered higher returns so far than other schemes. For instance, for central government employees it has given returns in the range 9.68-9.93 per cent since inception. For state government employees, it has yielded returns of 9.61-9.69 per cent. These are higher than the 8.5 per cent declared for the Employees’ Provident Fund (EPF) for 2020-21. However, withdrawals under the EPF are tax-exempt, whereas those under the NPS are partly tax-free.

Returns under the NPS are net asset values of the schemes, which keep fluctuating.  

Global examples of MARS
 

Switzerland: 2% of fund contributed

Chile: Pension fund managers must ensure returns fall within band defined differently depending on type of fund chosen by member

Denmark: ATP, the operator of a nationwide, mandatory defined contribution plan, must provide minimum relative return guarantee of member’s contributions, reset regularly in line with long-term interest rates

Hungary: Mandatory pension funds must ensure investment return is not lower than 1.5% below yield on Hungarian government bonds

Poland: Pension fund managers must ensure that returns fall within a band defined as the greatest of 4 percentage points below weighted-average real rate of return over previous 12 months and 50% of weighted-average return

Slovenia: Pension providers must meet minimum return, defined as 40% of average annual interest on Slovenian government bonds