Make National Pension System more robust without waiting for passage of the Pensions Bill

The National Pension System (NPS) has delivered average returns of 9.33% for state and central government employees in the past one year. The NPS has outperformed the employees provident fund ( EPF) and government’s General Provident Fund.

The three public sector fund managers — SBI, LIC and UTI — who manage the scheme for government employees have done a good job, given the dismal equity markets.

Sure, an increase in yields on government securities and other debt instruments has helped. Nevertheless, the performance only reinforces the point that the NPS is a sound vehicle for accumulating a corpus for retirement compared to the EPF whose management is opaque and return is sub-optimal.

Ideally, the NPS should deliver even better returns for investors that include government employees who joined service from January 1, 2004 and all voluntary subscribers. This calls for reforms.

One, the government should ease investment norms to allow higher exposure in equities. Central and state government NPS are now allowed to invest upto a maximum 15% in equities. The limit is 50% for non-government employees joining the NPS.

There is no reason why a person who joins the workforce at the age of 21 should not be allowed to invest a large proportion of her contribution in equities, if she chooses to take the risk in the initial stages. After all, equities deliver higher returns in the long run.

Two, government employees should also be given a choice in asset allocation in NPS, a defined contribution scheme where an employee contributes 10% of her basic salary and the government makes a matching contribution.

Three, the restriction that only public sector fund managers can manage civil servants’ NPS funds must go. The case is compelling, considering that the cap on the number of fund managers to manage NPS of voluntary subscribers has now been removed.

Competition will improve efficiency and generate better returns for investors. Finally, the government should also allow workers in the EPFO to voluntarily migrate to the NPS.