Retirement Products Need Not Compete With Investment Products

By Suresh Sadagopan

Retirement is a phase that does not get the importance it deserves. Most people prioritise the here-and-now goals over the longer-term, retirement goal. In fact, birthday celebrations and vacations get priority over retirement. Money is allocated towards these goals and sometimes used from money put aside for retirement. Retirement corpus gets stunted as a result.

People start thinking about retirement only in their forties and sometimes even fifties. It is at that time they start looking for avenues to invest and shore up their retirement corpus.

One of the good retirement products is the National Pension System (NPS), which, along with other investments, should be helpful in planning for the retirement phase.

A product specifically tailored for the retirement phase needs to facilitate regular, easy investment, a long-term outlook baked into its structure, high barriers for withdrawing for other goals in between, so that a good corpus can be built from which a credible, regular income in retirement becomes possible. These should be important features in a retirement product.

To start with, that is how NPS was designed. It allowed people to access it at 60 or beyond. Over time, there have been a lot of tweaks that have made NPS a very good retirement planning product.

Changes Proposed In NPS Now – There are some more changes proposed in NPS to make it even more attractive. There are some like the higher joining age of up to 85, possibility of 100 per cent equity allocation and multiple new schemes introduced along with existing schemes (called common schemes).

The new proposal increases complexity with the introduction of Multiple Scheme Framework (MSF) which introduces different personas, multiple schemes, ability to invest in multiple schemes under different PRANs, under a single PAN, possibility of withdrawing after just 15 years, that too up to 60 per cent (and annuitizing the balance 40 per cent), withdrawing up to 80 per cent on reaching 60 years (with 60 per cent tax free and 20 per cent at one’s tax slab), etc.

Multiple Scheme Framework (MSF) - MSF for NPS is one of latest tweaks from PFRDA. Here they are allowing a person to open multiple accounts and can maintain different schemes across various Central Recordkeeping Agency (CRAs).

Under MSF, the different schemes are tailored to different subscriber persona like Self-employed professionals, digital economy workers & corporate employees.  Each scheme will have two variants – one with moderate-risk and one with high-risk ( where equity contribution can go to 100 per cent). Another low-risk option can also be introduced as per discretion.

Cost is capped at 0.3 per cent p.a., which is still very low compared to most investment options.

Benefits Of MSF – The stated benefits are greater choice availability, transparent products that are also low-cost retirement schemes with better scope for personalising the investment as per their life stage.

The different schemes available for various personas make choosing the applicable schemes easier for the subscriber.  Multiple option availability is also aimed at spurring healthy competition among Pension Fund providers, expanding choices for people.

Do We Need So Many Options And Flexibilities? The answer to this is not that straight forward. Pension Fund Managers will be happy and maybe even the people as they get a lot of choices. On the face of it, giving a lot of choices looks like a great idea. But with so many choices, decision making becomes difficult.

Multiple schemes proposed make investments complicated, with these schemes having a minimum vesting tenure of only 15 years. Common schemes will continue to vest at 60 years of age.

NPS is a pension product that everyone should have. It should be easy to understand and opt for. With all these changes, NPS will become as complex as ULIPs. How many people properly understand how a ULIP works? Do we want to make NPS compete with Mutual Funds and ULIPs?

Retirement Product Architecture – Retirement products need to facilitate consistent, long-term savings, incentivise the subscriber to stay invested and not dip into the accumulations for other goals and even encourage them to defer taking out/ starting annuity as much as possible.

In a bid to offer liquidity, NPS has already given enough leeway to take out money for building a home, education, marriage, etc. While this may look right, such facilities give an invitation to prioritise other goals over retirement.

Allowing a 15-year exit ( though only 60 per cent can be taken out ) for MSF products is again wrong signalling. Also, allowing up to 80 per cent to be withdrawn at 60 years completely goes against the fundamental stated objective of helping build a good corpus that will ensure a stable income & comfortable retirement.

NPS should stick to its foundational principles of being a retirement product and should not get sidetracked into making it an investment product that can best MFs, ULIPs, etc. Simple products like PPF do a great job without much fanfare. So should NPS.

The author is the MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”.

(Disclaimer: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)