How NPS can help Indians retire with dignity
Premium- NPS schemes have low fund management expense—even lower than index funds
When people polled in a survey some years ago were asked about retirement planning, a staggering 44% said that they do not expect to retire. They agreed with the statement that said, “‘I have not thought about retirement because people like me cannot retire from work." Another 33% said there was no retirement plan. These people agreed with the statement ‘I know I will have to retire one day but I have not given it much of a thought’. All this shows that a large portion of the country’s population has not planned for their golden years.
The findings above were part of a most comprehensive survey five years ago by an RBI committee on ‘household finance’. The report highlighted that most savers were unaware of the ill effects of inflation on their long-term savings. Hence, there was a looming threat of people ending up with a much lower retirement kitty than that needed to maintain their current lifestyle.
A retirement plan for most Indians is either rental income from property, interest from fixed return instruments or most commonly being dependent on their children for financial support. Financial assets rarely figured as a priority for retirement planning, the survey revealed. The report also recommended easing of rules for investing in the National Pension System (NPS) and Atal Pension Yojana (APY). The annual reports of the NPS Trust had then described pensions as a sunrise industry for India.
Cut to 2022, NPS and APY put together have close to 50 million subscribers, according to NPS data. Despite this, India is still an under-serviced market in comparison to other developed countries, NPS, as a financial instrument, plays a vital role in offering multiple benefits. With a fund management cost of 0.09%, it is the most efficient instrument for those looking to start retirement planning. With greater awarenes, there has been an increase of 38.18% in the total subscriber base of NPS schemes in FY21.
NPS schemes have the lowest fund management expense. It is even lower than index funds. At the same time, fund managers of these schemes have ensured they continue to generate superior returns for subscribers. Contrary to the popular perception of being ‘passive’ index-hugging schemes, NPS schemes are managed in a much more ‘active’ manner, with fund managers making the most of an expansive investment universe.
The regulator has also been proactively broadening the investment universe, enabling fund managers to make prudent investment decisions, thereby generating a better alpha for subscribers. For instance, in July 2021, the PFRDA expanded the universe of equity stocks to the top 200 stocks, which meant that NPS schemes could now include some top-quality mid-cap companies in their portfolios. The regulator has also allowed investments in asset classes like Real estate investment trust (REITs) and InvITs, which will help subscribers benefit from the growing focus on infrastructure and real estate development.
An added advantage of NPS is the long-term nature of inflows that help fund managers make investment decisions without worrying about any near-term redemption pressure. That would also result in a lower churn of the portfolios resulting in lower switching costs and thus higher returns.
NPS subscribers are able to redeem 60% of their retirement corpus tax-free. The remaining 40% needs to be converted into an annuity which provides them with a steady cash flow throughout their lifetime. Compared to other traditional products, NPS brings in the much-needed equity asset class into the equation. This helps subscribers beat inflation and retain their ‘buying power’ even after retirement. Thus, be it superior returns, lower expenses, taxation benefits or transparency of fund management, NPS scores over other investment vehicles and provides citizens with a cost-effective vehicle to build their retirement corpus and lead a financially independent retired life.
Sumit Mohindra is CEO, ICICI Pension Funds Management Company.
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