The National Pension System (NPS) offers customers market link returns and helps them save money for retirement. There are seven different funding options, including equity and debt, and returns vary by asset class. As an NPS customer, you can share money in equity funds managed by different fund managers and across government and state government securities. Also, there is the Atal Pension Plan (APY) which offers fixed returns in the form of pension to the customer after the age of 60 years.
As of March 31, 2022, NPS funds representing equities and debt have generated up to 12 percent where the Atal Pension Scheme has registered a return of 9.4 percent since inception. PFRDA provides a clear picture of investors focusing on their retirement needs, including the returns generated by funds in NPS and APY in a working paper series titled ‘Perspectives on Pension Sector in India’ published recently.
In India, for the private organized sector, it is mostly Employees Provident Fund (EPF), provided by Employees Provident Fund Organization (EPFO), where employers also have to make a co-contribution. Also, there is a pension component in the form of Employees Pension Scheme (EPS).
In addition, insurance companies offer annual-based pensions and some mutual funds offer medium to long-term retirement-centric schemes.
The structure of the pension system
The National Pension System (NPS) of India provides a flexible mode of protection of old age income not only for salaried employees but also for the common man by providing National Pension Scheme (APY).
The entire pension system in India can be identified as three pillars.
Pillar-I: Non-subsidized basic social pension which is mostly funded by the government.
Pillar-II: Professional contributory pension scheme which can be either voluntary or compulsory. This could be a Defined Contribution (DC) or Defined Benefit (DB) plan. The National Pension System (NPS), which has been mandatory for government employees joining the service since 2004, falls under Pillar-II and is a defined contribution (DC) scheme.
Pillar-III: Voluntarily fully funded personal pension plan.
The National Pension System for Government Employees is a defined contribution plan with co-contributions from the government. It was opened in 2009 to all citizens regardless of their employment status. In other words, anyone between the ages of 18-70 can open an NPS account. Subsequently, NPS was opened in 2011 for the corporate sector. Therefore, corporates have the option to go with EPFO or NPS for their employees.
Annual rate of return in NPS, APY scheme
As of March 31, 200, the annual rate of return on various NPS schemes from the beginning has been between 9.0-12.7 percent. In the last five years, the range was 8.1-13.3 percent. As expected, the equity-based NPS scheme has an annual return of 13.3 percent. An ultra-conservative government-securities-based NPS scheme has posted annual returns of more than 8 percent. APY has posted a high average annual return of 8.8 percent over the last 5 years, with an annual return of 9.4 percent since its inception.
Workforce data in India
India has an estimated population of 136 crores. For 2019-20, the labor force was estimated at 56.3 crore, of which 53.5 crore were in employment. However, employment in the formal sector, where people can get some kind of access to social security, is comparatively less than 59 million.
The lion’s share of the labor force, estimated at 43.2 crore, is in the unorganized informal sector which has no statutory social security benefits. There were no structured pension schemes for the unorganized informal sector until the introduction of the Atal Pension Scheme (APY) in 2015.