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India's National Pension Program Gains Acceptance, But Hurdles Remain - SHRM India

​Companies in India are increasingly offering employees the option to save for retirement through the government-run National Pension System, but more work needs to be done to encourage employees to take up this option, say retirement planning experts.

"India is aging, and aging very fast," said Supratim Bandyopadhyay, chairman of India's Pension Fund Regulatory and Development Authority, speaking at a virtual conference recently. The average lifespan for Indians has also increased, raising the need to build a nest egg that provides a steady stream of money after retirement.

"That's why talking about pension has become absolutely necessary at this stage," said Bandopadhyay.

In the less than 10 years since Indian companies have been allowed to invest in the National Pension System, around 9,000 companies have signed up to offer it as an optional benefit to their employees. Within these companies, around 1.2 million employees have invested around 500 billion rupees ($6.7 billion) as of July 31, a nearly 50% jump from March 31, 2019, according to NPS Trust data. Still, only a small fraction of the organized workforce in India is part of the pension system.

"All our research seems to be suggest that employees are falling short" on achieving their retirement needs, said Ritobrata Sarkar, head of the retirement practice at Willis Towers Watson India, which advises on employment benefit plans. In several surveys, Sarkar said they've found that employees rely on their employers for retirement benefits and that they are not saving enough.

"Corporates have to play a bigger role in promoting this," he said.

India doesn't have a social security system like many other developed countries. The closest to a retirement benefit in employees' pay package is the Employee's Provident Fund, a state-mandated benefit in which both the employer and employee co-contribute a portion of the employee's salary. The provident fund provides a return determined by the fund authority every year. However, it typically isn't high enough to build a sizeable pool of retirement savings given India's high inflation, say retirement experts. The National Pension System offers a way to fill the shortfall.

With regular contributions to both the provident fund and the NPS over the working life of an employee, it is possible to replace 30% to 40% of the last drawn salary at the time of retirement, according to Vishal Grover, practice leader, retirement and investment solutions at Aon India, a consulting firm.

"Employers should therefore take initiatives to educate employees on plans such as NPS early in their career," said Grover.

Investments into the NPS are allocated to stocks and bonds, as per the employee's choice. The ability to invest in stocks, which provide higher returns than bonds over long periods of time, allows employees' funds to grow more than they would in the provident fund, which predominantly invests in bonds.

"NPS presents a very good diversification strategy," said Grover. "The whole point of NPS is to get access to equities."

In addition, NPS fund managers charge less than .1% of assets, which further boosts its potential returns. In fact, NPS investments have returned around 11% annualized over the past five years in a program offered to government employees. In comparison, the provident fund has paid out 8.5% annually in recent years, the government reports.

Roadblocks to Wider Acceptance

Though most prominent companies in India now offer the NPS as an optional benefit, the program's "takeup" rate - or the percentage of employees opting for it - remains small. Experts attribute this to a number of reasons.

One is the lack of any obvious financial incentive. If an employee opts for the NPS, the company deducts a part of the employee's salary - up to 10% - to make the investment. There is no co-contribution, unlike the provident fund where an employer's contribution is mandated by law.

"Employees realize that if they opt for it, there is a reduction in their take-home pay," said Grover. This keeps many away.

"We often tell employers that there should be some incentive from the employer," said Sarkar of Willis Towers. For instance, within the 10% of salary invested, the firm can pitch in 2% and the rest can be deducted from the employee's salary.    

"You have to encourage and incentivize people," said Sarkar.

Another roadblock to greater acceptance of the pension system is a lack of education about the program and the importance of saving for retirement. Many companies offer NPS only to tick off a box, and few make a concentrated effort to promote financial wellbeing for their employees.

"As an HR or compensation benefits professional, if you yourself are not invested in that particular benefit, then it's very unlikely that you'll go out of your way to promote it," said Sarkar.

The structure of the pension product also poses hurdles. The NPS doesn't provide guaranteed returns, which makes some employees hesitate, said Grover of Aon. And some employees don't like the strict rules that prevent funds to be withdrawn from the NPS early, even though that helps preserve retirement savings.

Employees can only withdraw funds after having been invested for at least 10 years, and if they withdraw before the retirement age of 60, at least 80% of the accumulated money must be converted into an annuity that would provide a monthly income.

In comparison, funds from the Employees Provident Fund can be partly withdrawn before retirement for such special events as building a home or to meet education or wedding expenses.

Another challenge is how the money is received on retirement. If withdrawn after retirement, at least 40% of the accumulated funds must be converted into an annuity which provides a regular payout. In comparison, money from the provident fund is received as a lump sum.

India's pension fund authorities say they are mulling ways to make the NPS more attractive for individuals, but the growing role of NPS is already visible in corporate India.

Many traditional companies have long offered another retirement benefit to employees - the Superannuation fund - but in recent years, it's been replaced it with the NPS. 

"Now, NPS is more prevalent and more popular as far as a corporate pension arrangement is concerned," said Sarkar. 


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