National Pension System: PFRDA Invites Public Feedback On Proposals To Enhance NPS With Assured And Predictable Pension

The Pension Fund Regulatory and Development Authority (PFRDA) issued a consultative paper on the National Pension System (NPS) last week, seeking feedback from the stakeholders and the general public. The paper titled "Consultation Papers on Enhancing the National Pension System: Proposals for Flexible, Assured and Predictable Pension Schemes" has come at a time when the government employees are struggling to decide whether to stay with the NPS or switch to the Unified Pension Scheme (UPS). The basic difference between these two schemes is the surety of a predictable pension. Undoubtedly, it is a crucial factor, and that's why it has been considered to be included in the consultative paper to address the concerns of unpredictable corpus under NPS. However, unlike UPS, the proposed schemes are for all NPS subscribers instead of just the government employees. 

In this paper, PFRDA intends to adapt to the evolving retirement planning needs, considering longevity, consistency of contribution, market volatility, and different investment choices. NPS is a 'Defined Contribution' scheme and does not offer a 'Defined Pension'. This leaves subscribers uncertain about how much they would be able to accumulate over the years. There are only calculations and expectations based on historical data of market performance. To address this, the consultative paper proposes three distinct pension schemes.

The paper explores the transition from a pure defined contribution pension scheme to an ambition-based pension and eventually to an assured benefit pension scheme model. 

The idea is to generate interest among stakeholders, including pension funds, academics, and industry experts, to design pension schemes that can meet the needs of wealth maximisation, protection from inflation, and predictable income in retirement. The general public can also send their comments to the PFRDA by October 31, 2025.

The proposed three schemes are:

Pension Scheme-1: Maximising Wealth With Structured Payouts

This is proposed to be a non-assured scheme which will focus on maximising pension wealth for subscribers. The subscriber would define their 'desired pension' while the focus will be on wealth building and mandates a minimum 20-year accumulation. There is no limit on the maximum period of accumulation. In the decumulation phase, the scheme would offer step-up withdrawal (4.5 per cent annually with 0.25 per cent increase every year for 10 years) through a systematic withdrawal plan (SWP) and annuity after the age of 70 with coverage for spouse and children until the subscriber turns 90 years old, and after that as long as the subscriber is alive. 

Pension Scheme-2: Assured Benefits With Inflation Protection

It is an assured pension scheme aimed to provide a target pension with periodic adjustments for inflation, such as dearness allowance. The subscriber would need to make a cost-neutral contribution (CNC) with a 10 per cent buffer for market volatility and underfunding risks. The minimum accumulation is 20 years (no upper limit), followed by a fixed 25-year decumulation phase.

Pension Scheme-3: Predictable Income Via Pension Credits

PFRDA introduced an innovative concept of 'Pension Credits' in this scheme. Here, a pension credit is a notional financial unit. It would guarantee a monthly pension payout of Rs 100 for a specific period (1-5 years) upon maturity. The idea is based on goal-based investing and behavioural finance. It helps accumulate pension credits to ensure a target pension amount post-retirement. The proposal also explores creating a secondary regulated market for trading these credits. This would enhance liquidity and flexibility for subscribers. 

Pension funds will be managing the pool schemes from which pension credits will be issued. Each credit will assure a fixed monthly pension in the decumulation phase.

The detailed proposal is available for feedback from stakeholders and the public on the PFRDA website.