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The National Pension System (NPS) has emerged as a transformative force in India’s retirement planning segment.
What started in 2004 as pension reform for government employees has evolved into a comprehensive, voluntary savings vehicle, attracting participants from both government and private sectors.
While the progress has been significant, more needs to be done to build awareness and drive wider adoption.
With 7.77 crore subscribers, as of September 2024, the combined assets of NPS and Atal Pension Yojana (APY) — the government-backed pension scheme for the unorganised sector — have reached ₹13.31 lakh crore.
Over the past decade, NPS assets have registered a remarkable 37 per cent compounded annual growth rate (CAGR) to reach ₹2.76 lakh crore, driven largely by the 58 lakh non-government subscribers. Their number is expected to cross 66 lakh by March 2025, according to the Pension Fund Regulatory and Development Authority (PFRDA).
Finance Minister Nirmala Sitharaman recently highlighted the growing interest from the private sector — between March 2020 and March 2024, as against the 8 per cent growth in NPS assets from the government sector, the private sector raced ahead with 25 per cent growth.
Currently, private sector assets in NPS are growing at 43 per cent annually, signalling a significant shift in retirement planning.
Yet, this growth still falls far short of the latent potential and can be redoubled through broader reforms and incentives to spur more investment from the private sector.
Opening doors wider
NPS was initially targeted at new government recruits under a defined contribution (DC) model, replacing the older defined benefit (DB) pension system. In 2009, it was opened to all citizens for voluntary participation.
The PFRDA ensures transparency and enables participants to choose from a range of pension fund managers and asset classes.
As of September 2024, NPS’s government sector assets reached ₹10.1 lakh crore, with state government employees holding ₹6.53 lakh crore and Central government employees ₹3.57 lakh crore.
The overall NPS assets in India have grown frenetically since 2009, reaching ₹1 lakh crore by October 2015, ₹5 lakh crore by October 2020, and ₹10 lakh crore by August 2023.
Corporate adoption
As of September 2024, only 17,633 companies were registered under NPS, pooling 21.07 lakh subscribers. This includes 8.4 lakh subscribers cumulatively from public sector banks, regional rural banks, and central public sector enterprises (CPSEs).
Rishi Agrawal, CEO of TeamLease RegTech, a company that develops compliance management software, believes that additional tax incentives can spur more corporate participation in NPS. This includes raising the personal tax deduction limit and added corporate tax benefits, he says.
Pointing out that NPS offers flexibility, a range of investment options, tax advantages, and cost efficiency in the retirement space, Rahul Bhagat, CEO of DSP Pensions, advocates making NPS adoption mandatory for corporates, similar to the 401(k) system in the US, to drive significant growth. This, in turn, can enhance retirement savings of private-sector employees, he says.
Matching steps
NPS tier-2 accounts, which are currently fully taxable, must be taxed more lightly like mutual funds to attract more investors, Bhagat says. Furthermore, expanding the investment options beyond the BSE-200 companies will give pension fund managers more flexibility in delivering higher returns, he adds.
Agrawal suggests offering flexible withdrawal options to meet emergency needs such as health or education bills, similar to the Employee Provident Fund (EPF). Additionally, reducing the reliance on annuities or offering annuity options with higher returns could serve as assured post-retirement income streams, he says.
He points out that allowing employees greater control over their retirement investments, akin to self-directed retirement accounts, can make NPS more appealing to the private sector. Currently, NPS funds are invested in predetermined asset classes, limiting the potential for higher returns.
Road ahead
With the right policy initiatives, NPS is poised to lead India’s pension revolution, offering millions of citizens a secure financial future post retirement.
India’s aspiration to become a pensioned society is gradually taking shape. However, the growth of NPS in the private sector, though promising, requires more institutional support to reach its full potential.
As NPS grows, so does its role in ensuring financial security for millions of ageing Indians.
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