Deepak Mohanty, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), talked about the urgency of integrating pension planning into financial strategies while speaking at the third edition of Outlook Money’s 40After40 Retirement Expo in Mumbai.
“A pension should be a part of every savings portfolio, just as essential ingredients are to a wholesome meal,” said, Mohanty.
00:00Good afternoon. I thank Outlook Mani 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 pension accessible to all.
00:25You know, pension is a necessity. Prudent financial planning, especially early retirement planning, is important for long-term 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 socioeconomic 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% in 2022 to about 20.8% by 2050.
01:21This aging is likely to accentuate as every fifth Indian is expected to be over 60 years of age by the middle of this century.
01:31Life expectancy is also showing a steady increase with improved nutrition and healthcare.
01:39The rise in the share of older people coupled with, you know, higher longevity would imply that income provisions would have to be made for longer periods for this and post retirement life.
01:53Second, increasing dependency.
01:57The older dependency ratio is expected to increase from 18% in 2020 to 30% by 2050, exerting pressure, not only our younger generation, but also on our financial resources.
02:11Its financial implication would be disproportionately large unless working as population make provision for their future.
02:19Third, rising, we just heard about health insurance, you know, it is the healthcare cost.
02:26As people age, healthcare expenses typically increase.
02:30A well-planned pension provides the resources to manage this cost and make oldest care affordable.
02:37Fourth, changing family dynamics.
02:40The implied insurance of traditional family structure where elderly parents largely relied on the children for support is changing.
02:49Adequate pension offer financial independence to manage one's own affair.
02:55In this context, let me turn to the features of the national pension system.
03:04Against this backdrop, how NPS is positioned to cater to the wider need for pension.
03:12NPS is a flexible, digitally enabled, easily accessible, low-cost pension product with market-driven competitive returns.
03:22The introduction of NPS in India marked a paradigm shift in transition for a defined benefit DB 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.
03:46First for the government employees and then extended to the private corporate including the common person.
03:53And now to children with the scheme of NPS Vastchilia.
03:58NPS Vastchilia can be seamlessly ported to workplace pension on the child, you know, coming of age and joining the workforce.
04:06Thereby providing continuity to one's retirement savings account.
04:11Thus, any member of the family from infancy to 70 years can really join NPS.
04:20Flexibility 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 a specialized activity in a professional and cost-effective manner,
04:37attaining economy of scale.
04:40This architecture helps minimize the risk of a sole dependency on entities involved and eliminate 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 e-NPS or physically through bank branches including now we have enabled the regional rural banks, they can also offer NPS.
05:14Since we are partnering with this event, I just saw outside there is a stall by, you know, our NPS trust.
05:20So there's a QR code one can scan and can seamlessly also join, you know, through e-NPS without hardly any cost.
05:29Third, 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 lifecycle funds which balance risk with A's 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 choose their, you know, own asset class depending on their risk appetite.
06:04For example, one can invest up to 75% in equity irrespective of one's own A's.
06:12Because if you are doing that, you know, your own active choice, you can make your own cocktail of what kind of a pension that you need.
06:21Fourth, you know, 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 1,000 rupees.
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, you know, contemplating to retire early can front load their contribution to achieve their retirement goal.
06:57Similarly, a subscriber can defer his or her exit and can stay invested in NPS up to the, you know, up to the age of 75 years.
07:09Additionally, the subscriber has an option to draw the lump sum amount in the form of, you know, systematic lump sum withdrawal, SLW, in a phase manner up to the age of 75 years without, you know, and they can also withdraw anytime.
07:25If they change their mind, they can withdraw anytime the entire amount also.
07:32Let me just capture briefly the progress of NPS.
07:35At present, NPS has around 16 million subscribers, 9.6 million from the government side, 6.4 million private subscriber with a corpus of almost 13.4 trillion rupees.
07:51Both private citizens and corporates have enrolled with NPS.
07:57Private sector NPS assets have also shown substantial growth in the recent years.
08:02The corpus from the private sector is about rupees 1, 2.8 trillion.
08:08There are actually about, you know, 19,000 corporates with about 2.2 million subscribers, including 1.3 million from the private corporate sector.
08:19But the problem is the adoption of NPS by the private corporate employees, however, is not commensurate with the large number of corporates that have joined, underscoring the need for concerted effort to tap into the potential.
08:35The popularity of NPS is also rising among individual subscribers with a subscription base of 4.2 million, expanding at a compound annual growth rate of about 22%, surpassing the growth of employer-based subscription.
08:52That means both from the government and what is coming from the corporate sector.
08:57The scheme under NPS has generated an attractive return.
09:01The average annual return since inception under the equity scheme in NPS has been 13%, with 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, mix of, you know, equity and debt, and since inception, it is given a return of 9.5% per annum.
09:24So these are clearly very attractive returns if you compare with the market returns that you get in competing products.
09:32Despite all this, why is this pension coverage is so inadequate?
09:37The pension coverage in India is inadequate mainly because 80% of our workforce is engaged in the unorganized and informal sector where they don't have access to occupational pension as in the organized sector.
09:52As economic survey 2425 shows that around 58.4% of workforce was self-employed, 19.8% was casual labor, where there is no statutory access to social security benefits like workplace-related pension.
10:09Similarly, on ISRAM portal, Ministry of Labor and Employment, which puts out over 305 million unorganized workers were registered, suggesting that the bulk of the workforce goes uncovered by pension.
10:26You know, this challenge is not limited to us.
10:29A recent study by the Organization for Economic Cooperation and Development, OECD, showed that Asia and Pacific region's pension system are facing common challenges as they attempt to expand coverage and ensure adequacy and fairness while maintaining fiscal sustainability.
10:47While pension system designs vary, coverage of contribution scheme is a common challenge because of stubborn informality, because people would have to self-contribute, self-motivated to save for the future.
11:02At the same time, regional and global experience suggests potential for coverage expansion by focusing on workers not yet covered by design, such as self-employed, business owners, those in enterprises below certain size and gig and platform workers.
11:21Let me conclude.
11:24There is a need to expand pension coverage so that people have adequate post-retirement income to lead a life of dignity.
11:32However, the adoption rate is low even among people who have the income to contribute, partly 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 status.
11:55We have been working on improving the accessibility of NPS, both digitally and physically, to every citizen of India and also to increase awareness.
12:07Once again, I thank Outlook Money for inviting me to interact with you.
