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In the midst of the ongoing debate surrounding the National Pension System (NPS) and the Old Pension System (OPS), along with some states opting out of the NPS, the assets under management (AUM) for state government employees in the NPS experienced a 25% increase in the fiscal year 2022-23.
During an interaction with the media, Deepak Mohanty, the Chairman of the Pension Fund Regulatory and Development Authority (PFRDA), revealed that the number of state government employees participating in the NPS also rose by 9% in FY23.
While avoiding taking sides in the NPS versus OPS debate, the PFRDA Chairman acknowledged that defined benefit plans like the OPS are not sustainable in the long run. He emphasized the global trend towards fully-funded schemes, stating that even in countries with defined benefit plans, such plans are largely financed through payroll taxes.
The Chairman of the NPS regulator stated that the NPS has the potential to provide similar monthly payouts as the old pension system. He explained that under the old pension system, retirees receive 50% of their last drawn pay. If an individual accumulates funds under the NPS for a reasonable period, approximately 30 years, and annuitizes the entire corpus upon retirement, they can potentially receive around 50% of their last drawn salary. Mohanty, who assumed the position of PFRDA Chairman in March, highlighted the attractiveness of the NPS as a competitive pension product, based on its returns over the past 14 years.
Due to several state governments adopting the old pension system, the sustainability of such a move has been a subject of intense debate. Under the OPS, the pension corpus is funded by the employer, with government funds being allocated for government employees. The employee receives 50% of the last withdrawn salary plus dearness allowance as a pension, with the latter being revised every two years.
Mohanty admitted that the NPS does not offer the benefit of indexation, which involves adjusting the pension amount to account for inflation. However, he emphasized that the NPS remains a highly competitive pension product in the market due to the favorable returns it has generated over the last 14 years since its introduction for the private sector.
Expressing concern about the lack of awareness regarding retirement savings in general, including the NPS and its benefits, the PFRDA Chairman emphasized the need to promote the idea of retirement savings. The PFRDA plans to engage more with corporates, HR departments, and trade bodies to raise awareness about the NPS. The Chairman expects fund managers, intermediaries, and agents to contribute to this effort as well.
Mohanty stated that the NPS has significant untapped potential, having initially been introduced for government officials but now being accessible to all. He believes that future growth in the NPS will be driven by the private sector, including individuals and corporations. He also highlighted the gender imbalance in NPS participation, which is partly due to more men being engaged in formal employment. He encouraged those who can afford it to consider including their spouses in the scheme, emphasizing that opening an NPS account requires a low threshold, such as an annual contribution of Rs 1,000.
In conclusion, Chairman Mohanty reiterated the attractive nature of the NPS as a scheme, citing its competitive returns. He emphasized the global trend toward fully-funded schemes and the need for improved pension literacy, as well as the importance of having access to multiple social security or old age income schemes, rather than relying solely on one scheme such as the Employee Provident Fund (EPF).