The National Pension System (NPS) is mandatory for some and optional for others. However, the adoption rate in the private corporate sector is very low.
A single pension plan may be insufficient to sustain retirement life; however, people can immensely benefit from the National Pension System (NPS), which is open to all citizens, from government and corporate employees and self-employed to resident, non-resident, and overseas Indians, said Deepak Mohanty, chairperson of the Pension Fund Regulatory and Development Authority (PFRDA) in a speech on NPS at the ICC Conclave in Mumbai on Friday.
NPS subscribers and its assets under management have grown significantly in recent years, pointing to its growing popularity. However, according to Mohanty, its penetration in the corporate sector has been far from satisfactory. Corporates must educate their employees about the scheme and ask them to join for their long-term financial security, he said in his address.
Mohanty said, “Despite a decent annual rate of growth of corporates joining the NPS, the take-up rate of their employees joining the scheme is only around 11 per cent. This coverage may not improve significantly without a nudge from the employer side.” For this, the corporates must engage more with the points of presence (PoPs) and conduct awareness sessions for employees.
Mohanty said that NPS is open to all. Even those who do not have a regular income, such as agricultural workers, can join NPS with a minimum annual contribution of Rs. 1,000.
NPS has given 14.2 per cent compound annual growth rate (CAGR) in the equity segment since inception; it is 9.1 per cent for corporate bonds and 8.9 per cent for government securities. The government employees have seen a CAGR of 9.6 per cent.
To maintain a similar lifestyle after retirement, he said a desirable replacement rate (pension) could be pegged at 40 per cent of the last pay after 30 years of working, citing the International Labour Organisation (ILO) convention 102. As the nature of employment is changing and a significant part of the workforce is working in the unorganised sector, these workers don’t benefit from occupational pensions. However, they also need old-age financial security and cannot depend solely on the social security provided by the government to low-income individuals. It may not be sufficient for them, so they need to save more for themselves.
The Employees’ Provident Fund (EPF) is mandatory by law for an employer to offer to its employees if it has employed over 20 people and pays up to Rs 15,000 as a monthly salary. For those earning more than Rs 15,000 as a salary, employers can offer EPF or NPS. They can also establish an EPFO-recognised or income tax commissioner-approved trust, or provide a combination of these schemes.
Mohanty highlighted that employers often “do not segregate their employees in terms of salary for providing retirement benefit, and apply a common scheme for all their employees”.
Referring to the Willis Towers Watson survey, he said that PF & EPS schemes could provide a replacement rate of 30 per cent. It could reach 46 per cent by adding other approved superannuation funds and go up to 63 per cent by adding NPS. So, in short, multiple retirement schemes by employers can provide the desired replacement rate (pension), enabling people to live a dignified life when they are not earning anymore.
NPS is voluntary, portable, and flexible in terms of deposits, investment choices, and withdrawals. It could be an option to ensure financial security after retirement. It has 15 million subscribers, including 17,633 corporates offering NPS to over 2.1 million subscribers. However, compared to the number of corporates providing EPFO coverage, the number of NPS-providing corporations is too small, just 2.5 per cent.
As a result, the number of subscribers in the private corporate sector is low. A significant number of corporate subscribers are from public sector banks and central public sector enterprises, indicating the scope for more private sector companies to take up the scheme.
Now that the contribution limit for employers has been increased in the Union Budget 2024-25 from 10 per cent to 14 per cent, it can enhance employee tax benefits under section 80CCD of the Income-tax Act under the new tax regime.