The Pension Fund Regulatory and Development Authority (PFRDA) decision to introduce two more life-cycle funds for private sector subscribers to the National Pension Scheme (NPS) is a good idea since it gives them a far greater ability to have their savings invested in equity markets that deliver a better return. While the ceiling of equity investments is capped at 50% in case a subscriber wants to choose her own investment plan, it changes in the auto-choice or life-cycle plan. Right now, under the auto-choice plan, equity investments are capped at 50% till a subscriber is 35 years old and then it gets reduced—at the age of 40, the equity share gets limited to 40%, to 20% at the age of 50 and to a maximum of 10% over the age of 55. Under the ‘aggressive life-cycle fund’, the 50% cap at the age of 35 gets raised to 75% and, under a ‘conservative life cycle’ fund it gets reduced to 25%. PFRDA has also suggested the 50% and 25% cap funds be made available to government employees as well—right now, their maximum equity is capped at 15%.
While this is a good start, what is not clear why the 75% option should not be available to government employees as well? After all, if more equity is good for the pensioner—that is why it is being recommended for the private sector—there is no reason why this should not be given to new government employees who are now no longer covered by the old pension scheme that guaranteed a pension equal to half the salary of someone of equal rank. The GN Bajpai committee had estimated, last year, that if only 10% of a corpus of Rs 1,000 crore is invested in equity, the absolute returns at the end of 30 years will be Rs 17,779 crore—if, however, the equity component is raised to 50%, the absolute returns rise to Rs 27,354 crore. A 1% increase in annual returns, it calculated, increases the terminal pension wealth for a full 40-year lifetime of contributions by as much as 30%.
What is even more problematic is why the choice of deciding where your savings are to be invested is not given to the crores who are covered by the Employees Pension Fund Organisation (EPFO)—not only do trade unions effectively decide how much of annual savings are invested in the market, there is no choice to pick fund managers in the way that the NPS allows. If the EPFO structure is so rigid, the next best choice is to allow subscribers to migrate to other structures such as the NPS. What is required is a thorough overhaul of the pension structure which has to correct not just the shortcomings of the EPFO but also those of the NPS. Under the current NPS structure, for instance, savers have to park a portion of their corpus in annuities that give a very low return.
