Ahead of UPS, PFRDA chairman talks about an NPS feature that makes it unattractive and how to improve it

While the National Pension System (NPS) offers many attractive features for long-term retirement planning, there is one aspect of the scheme that deters many potential subscribers.

On exit from NPS, it is mandatory for subscribers to purchase annuity plans with 40% of their corpus. The remaining 60% of the NPS corpus can be withdrawn as a lump sum and that too tax-free.

Subscribers have no problem with the tax-free lump sum withdrawal feature. However, they find the mandatory annuity buying feature unattractive as annuity schemes offered by pension providers give very low returns.

"A recurring concern regarding the NPS is the unattractive annuity rates provided at the time of retirement. On exit, an NPS subscriber has necessity to annuitise at least 40 percent of her corpus," Dr Mohanty said.

He, however, also shared a way to address this issue of unattractive returns from annuity plans.

"With increasing number of subscribers superannuating from NPS in the coming years, there is lot of opportunity in the NPS annuity segment. It is reasonable to expect the actuaries to design innovative products, particularly variable annuity that provides a hedge against inflation risk," Dr Mohanty said.

Dr Mohanty said that in UPS also, actuaries will play a major role in periodically assessing the sustainability of the scheme.

"The NPS for the central government subscribers is morphing into the Unified Pension Scheme (UPS) which is a fully funded defined-contribution (DC) and defined benefit (DB) scheme. In this scheme, the actuaries will have a major role to play in the periodic assessment of the sustainability of the scheme."

Both NPS and UPS will be managed by the Pension Fund Regulatory and Development Authority (PFRDA) chaired by Dr Mohanty.