Innovation in NPS | Deepak Mohanty, Chairman, PFRDA - video Dailymotion

OutlookIndia

Deepak Mohanty, chairman of the Pension Fund Regulatory and Development Authority (PFRDA) delivered an insightful address at the third edition of Outlook Money’s 40After40 Retirement Expo, currently underway in Mumbai.  He emphasised on the value of incorporating pension plans into individual savings strategies, saying they are a financial requirement rather than only an optional addition. Giving an example with a balanced Indian thali, he said, “A pension should be a part of every savings portfolio, just as essential ingredients are to a wholesome meal.”  He spoke of the importance of early retirement planning, noting that pensions provide long-term financial security for individuals and their spouses, which is a vital factor in today’s socio-economic landscape.  Read more: https://www.outlookmoney.com/retirement/forty-after-forty  #OutlookMoney40after40

Transcript

00:00Good afternoon.

00:06I thank Outlook Money for this opportunity to be part of this August gathering.

00:14I propose to discuss how innovation in the National Pension System that is NPS has made

00:21pension accessible to all.

00:25You know pension is a necessity.

00:29Current financial planning, especially early retirement planning is important for long

00:34term financial well-being.

00:37Pension as a financial product is not readily substitutable with any other financial assets.

00:49Pension provides lifelong financial security for self and spouse on retirement.

00:55Pension assumes added urgency at the current juncture of our socio-economic development.

01:01In this context, I may highlight a few issues.

01:05First, rising longevity.

01:09The share of population over the age of 60 years is projected to increase from 10.5%

01:15in 2022 to about 20.8% by 2050.

01:22This aging is likely to accentuate as every fifth Indian is expected to be over 60 years

01:27of age by the middle of this century.

01:32Life expectancy is also showing a steady increase with improved nutrition and health care.

01:40Rise in the share of older people coupled with higher longevity would imply that income

01:47provisions would have to be made for longer periods for decent post-retirement life.

01:53Second, increasing dependency.

01:57The old age dependency ratio is expected to increase from 18% in 2020 to 30% by 2050,

02:05exerting pressure not only on our younger generation but also on our financial resources.

02:12This financial implication would be disproportionately large unless working-age populations make

02:17provisions for their future.

02:19Third, rising health insurance costs.

02:26As people age, health care expenses typically increase.

02:30A well-planned pension provides the resources to manage this cost and make older care affordable.

02:37Fourth, changing family dynamics.

02:41The implied insurance of traditional family structures, where elderly parents largely

02:46relied on their children for support, is changing.

02:50Adequate pensions offer financial independence to manage one's own affairs.

02:59Let me in this context turn to the features of the national pension system.

03:05NPS is a flexible, digitally-enabled, easily accessible low-cost pension product with market-driven

03:20competitive returns.

03:23The introduction of NPS in India marked a paradigm shift in transition for a defined

03:29DB plan to a defined contribution system, enhancing the stability of our pension system.

03:36In the past, pension was perceived to be the privilege of government employment.

03:41It is no longer so with the introduction of NPS in 2004, first for the government employees

03:48and then extended to the private corporate, including the common person, and now to children

03:54with the scheme of NPS Vastilya.

03:58NPS Vastilya can be seamlessly ported to workplace pension on the child coming of age and joining

04:05the workforce, thereby providing continuity to one's retirement savings account.

04:10Thus, any member of the family from infancy to 70 years can really join NPS.

04:20Technology in NPS is the result of innovation informed by user experience.

04:25First, NPS has an unbundled architecture, with each intermediary at the background undertaking

04:32a specialized activity in a professional and cost-effective manner, attaining an economy

04:38of scale.

04:40This architecture helps minimize the risk of a sole dependency on entities involved

04:46and eliminates the risk of failure of the system.

04:49Second, digitalization has played a crucial role.

04:54It eases onboarding and significantly reduces the cost to the subscriber.

04:59One could join NPS digitally using net banking, mobile apps, or eNPS, or physically through

05:07bank branches, including now we have enabled the regional rural banks, they can also offer

05:13NPS.

05:14Since we are partnering with this event, I just saw outside there is a stall by our NPS

05:19trust, so there is a QR code one can scan and can seamlessly also join through eNPS

05:27without hardly any cost.

05:30Third, NPS offers flexibility in selecting pension funds and asset allocation.

05:37It offers auto-choice and active choice of asset allocation.

05:41In auto-choice, one gets to select any one of the four life-cycle funds which balance

05:47risk with age among various asset classes.

05:50For example, as one ages, the equity allocation tapers down automatically.

05:55Alternatively, there is an active choice where the subscriber chooses their own asset class

06:03depending on their risk appetite.

06:05For example, one can invest up to 75% in equity irrespective of one's own age, because if

06:12you are doing your own active choice, you can make your own cocktail of what kind of

06:19a pension that you need.

06:22Fourth, NPS provides a very low threshold of entry, making it truly a people's product.

06:31The NPS account remains active only with an annual contribution of Rs. 1000.

06:37It is not necessary to contribute every month.

06:40Thus, NPS is also suitable for people with irregular income.

06:44There is no upper limit for contribution.

06:47It has its own advantage.

06:49For example, youngsters contemplating to retire early can front-load their contribution to

06:56achieve the retirement goal.

06:58Similarly, a subscriber can defer his or her exit and can stay invested in NPS up to the

07:07age of 75 years.

07:10Additionally, the subscriber has an option to withdraw the lump sum amount in the form

07:16of systematic lump sum withdrawal, SLW, in a phased manner up to the age of 75 years.

07:25They can also withdraw any time if they change their mind.

07:28They can withdraw any time, the entire amount also.

07:32Let me just capture briefly the progress of NPS.

07:36At present, NPS has around 16 million subscribers, 9.6 million are from the government side,

07:446.4 million are private subscribers, with a corpus of almost Rs. 13.4 trillion.

07:53Both private citizens and corporates have enrolled with NPS.

07:57Private sector NPS assets have also shown substantial growth in the recent years.

08:03The corpus from the private sector is about Rs. 2.8 trillion.

08:09There are actually about 19,000 corporates with about 2.2 million subscribers, including

08:151.3 million from the private corporate sector.

08:20But the problem is the adoption of NPS by the private corporate employees, however,

08:25is not commensurate with the large number of corporates that have joined, underscoring

08:30the need for concerted effort to tap into the potential.

08:36The popularity of NPS is also rising among individual subscribers, with a subscription

08:41base of 4.2 million, expanding at a compound annual growth rate of about 22%, surpassing

08:49the growth of employer-based subscription, that means both from the government and what

08:55is coming from the corporate sector.

08:58The scheme under NPS has generated attractive returns.

09:01The average annual returns in the inception under the equity scheme in NPS has been 13%,

09:07with 9% for the corporate debt scheme and 8.8% for the government security scheme.

09:13And for the central government, which is a conservative scheme, a mix of equity and debt,

09:19and since inception it has given a return of 9.5% per annum.

09:24So these are clearly very attractive returns if you compare with the market returns that

09:29you get in competing products.

09:33Despite all this, why is this pension coverage so inadequate?

09:37The pension coverage in India is inadequate mainly because 80% of our workforce is engaged

09:43in the unorganized and informal sector, where they don't have access to occupational pension

09:50as in the organized sector.

09:52As the economic survey, 24-25, shows that around 58.4% of workforce was self-employed,

10:0019.8% was casual labor, where there is no statutory access to social security benefits

10:07like workplace-related pension.

10:09Similarly, on the ISRAM portal, Ministry of Labor and Employment, which puts out, over

10:15305 million unorganized workers were registered, suggesting that the bulk of the workforce

10:22goes uncovered by pension.

10:27This challenge is not limited to us.

10:29A recent study by the Organisation for Economic Co-operation and Development, OECD, showed

10:34that Asian Pacific region's pension systems are facing common challenges as they attempt

10:39to expand coverage and ensure adequacy and fairness while maintaining fiscal sustainability.

10:47While pension system designs vary, coverage of contributory schemes is a common challenge

10:53because of stubborn informality, because people would have to self-contribute, they would

10:57have to be self-motivated to save for the future.

11:02At the same time, regional and global experience suggests potential for coverage expansion

11:09by focusing on workers not yet covered by design, such as self-employed, business owners,

11:15those in enterprises below certain size, and gig and platform workers.

11:22Let me conclude.

11:23There is a need to expand pension coverage so that people have adequate post-retirement

11:29income to lead a life of dignity.

11:32However, the adoption rate is low even among people who have the income to contribute,

11:37partly due to inadequate appreciation of the need.

11:41I hope events like this, focused on retirement planning, will help in improving awareness.

11:47The NPS has made pension available to all, irrespective of one's income and employment

11:54status.

11:55We have been working on improving the accessibility of NPS, both digitally and physically, to

12:02every citizen of India, and also to increase awareness.

12:07Once again, I thank Outlook Money for inviting me to interact with you.

Innovation in NPS | Deepak Mohanty, Chairman, PFRDA

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