National Pension Scheme, which was introduced just 2 years back, is for those investors who wish to receive a monthly income after investing for 5-10 years. It comes with an initial lock in period of 1 year after which the investor can prematurely withdraw funds from the account at an interest of 3% and if the investor wishes to withdraw before the completion of 3 years of his NPS fund, he needs to bare an interest charge of 1%.
Currently the Pension Fund Regulatory and Development Authority Bill, 2011, (PFRDA Bill, 2011) has proposed a Standing Committee to review the functioning of the NPS in order to increase its popularity among investors and increase its efficiency. So far the recommendations that have been made are to highlight the need for a minimum guarantee on returns and which also allows repayable withdrawals in advance on the fund.
Currently, the fund provides its services to about 53,954 investors and with the recent proposal to modify the system; it aims to increase its customer base. Following are the suggestions that have been proposed by the standing committee:
Implementing a minimum guarantee:
A minimum guaranteed return on the contributions made by the members of the NPS has been proposed by the Committee. The main reason why this has been proposed is to streamline the returns generated by the NPS with other pension related products such as the EPS (Employees’ Provident Fund Scheme). This step has been taken by keeping in mind the fact that the returns should not be subjected to the market volatility that can hamper the investor’s growth. The committee is standing for the right of the investors so that they can get a minimum assured amount as a guaranteed returns so their investments do not become a disadvantage in case of negative returns.
The solution for the above mentioned problem, as proposed by the Committee, is to peg the minimum rate of return with the return generated by the EPF. The main advantage is that once the return percentage is fixed, it is carried forward for the entire year. If the rate is cut down due to market fluctuations, then the rate will be corrected and will be used for the entire year that follows.
The system of NPS is quite complicated. If you are an investor who is from the unorganized sector, your funds will be invested in the following funds: Government securities, equity, fixed income instruments. And only 50% of your funds will be invested in equity. There are two ways by which you can invest your funds. One is the active choice where you can decide the allocation of your funds in the above mentioned asset classes by yourself. The second one is auto choice where the fund will by itself allocate funds into the 3 assets classes by investing 50% in equities till the age of 55 and after that 10% in debt so that your investment stabilizes by the time you reach your retirement.
The standing committee also requested to allow partial withdrawals by investors which need to be repaid by the investors. If this system is enabled, investors will be able to withdraw partially from their fund accounts after servicing 10-15 years with it and are also entitled to repay it back in due course of time. This decision comes in after the committee realized the strict lock in period and the difficulties that it poses to investors who may be required to utilize funds in case of emergencies. It is not possible for a person who is going to retire to opt for a personal loan or any other type of loans, that are charged with high interest rates as it can burden the finances of a man who is about to hang his boots. To secure them from such unwanted credit requirements, The Standing Committee decided to consider this facility.