Reduced income and higher healthcare expenses are major concerns facing retirees, so annuity plans are vital to ensure lifelong income, the Pension Fund Regulatory and Development Authority (PFRDA) chairperson, Deepak Mohanty, said at a Pune event this week.

Addressing a programme at the National Insurance Academy (NIA), Mohanty said, “There are two key concerns: drop in income and rise in health expenditure. When we speak of pension, which is a predictable flow of regular income, annuity becomes an important instrument. The National Pension System (NPS) that PFRDA regulates, on exit, a subscriber ought to have at least 40 per cent of her accumulated corpus in an annuity to ensure a lifelong income.”

NPS is a government-backed small savings scheme for retirement. At maturity, the subscriber can withdraw 60 per cent of the funds in a lump sum or systematically at fixed intervals. They must use the rest to buy an annuity plan. However, they can invest up to 100 per cent in annuities. To strengthen the NPS, Mohanty also announced to launch a “balanced life cycle fund” soon, underscoring the need for different products for retirement planning.

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Retirement savings will be critical in a country of 1.4 billion people, the world’s most populous nation, given that by mid-2050, one in five Indians will be above 65. Additionally, higher life expectancy and the increasing old-age dependency ratio (population over 65 years of age per 100 working age, 15-65 years) from 7.4 in 2000 to 10.1 in 2021 raises major concerns about how they could sustain themselves. Mohanty said digitisation has changed people’s work, giving rise to a gig economy, where freelancing jobs and app-based services are common, but there is no social security net. In this scenario, ensuring financial security is an individual responsibility.

NPS As Savings Tool

Referring to a Niti Aayog’s position paper, Mohanty said that 78 per cent of India’s old people do not have a pension cover, so NPS tries to address the issue by providing a “sustainable solution for having adequate retirement income in old-age”.

Choice & Flexibility: NPS provides subscribers the choice to select from three central recordkeeping agencies (CRA), 11 pension fund managers (PFMs), and annuity service providers (ASPs). Also, it has two investment options: Active and Auto choice.

In the active mode, subscribers can decide their allocation in equity, corporate and government securities, or alternate tools. In the auto mode, they can select from three life cycle funds (aggressive, moderate, and conservative), depending on the subscriber’s age.

Balanced Life Cycle Fund

Mohanty said PFRDA wants to strengthen the regulatory architecture to improve product design, provide more choices and expand NPS penetration. “In this direction, soon we would be launching a balanced life cycle fund with a higher allocation to equity (up to 50 per cent); the tapering of equity would start from 45 years of age. This would help maximise the pension wealth in the long run while optimising the risk and return. It would be rolled out in a few months,” he added.

Under the existing choices, the maximum equity allocation at the age of 50 is 75 per cent in active choice and 20 per cent in auto choice.

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Active Choice

A subscriber can take a maximum of 75 per cent exposure in equity up to the age of 50, and then it reduces gradually to 50 per cent as per the PFRDA rules. It remains the same for 60 years and above.

Auto Choice

Auto choice allows a maximum of 20 per cent in the equity fund at 50 years of age.

Aggressive Fund: The maximum equity allocation is 75 per cent but only up to the age of 35. It reduces with age. At 45, it can be 35 per cent, at 50, it is 20 per cent, and at 55 years and above, 15 per cent.

Moderate Fund: The equity allocation can be up to 50 per cent at 35 years of age. Then tapering starts at 45, when the equity allocation becomes 30 per cent, at 50, it is 20 per cent, and at 55 and above, it is 10 per cent.

Conservative Fund: The highest equity allocation in this fund can be 25 per cent up to 35 years of age, 15 per cent at 45, 10 per cent at 50, and 5 per cent at 55.

NPS subscriptions have seen steady growth lately, from 90.81 lakh in 2020 to 147.15 lakh in Mach 2024, a 25 per cent increase in the private sector and an 8 per cent increase in the government sector. The NPS’s new balanced life cycle fund could bridge the gap for equity allocation in active and auto choices.