Amid investor apprehension over erosion in pension wealth due to the fall in share and bond prices on the year of retirement, the Pension Fund Regulatory and Development Authority on Wednesday relaxed rules to help investors of the National Pension System (NPS) defer withdrawal of the entire corpus by up to 3 years.
At present, a NPS subscribers can withdraw up to 60% of his accumulated pension corpus after retirement and the remaining amount has to be used to buy an annuity product from the PFRDA empanelled insurers.
Although the PFRDA allows deferment of the lump sum withdrawal from NPS until the investor attains 70 years of age to provide some cushion against unfavourable market conditions, the annuity has to be bought on the year of retirement.
Investors have urged PFRDA to amend the rules as buying an annuity in times of a dismal market condition can lower the pension income and hence go against the objective of the pension reforms that the government is trying to push forward to lower its fiscal burden.
In a circular issued on Wednesday, PFRDA said the annuity purchase at the time of exit from NPS can be deferred up to a maximum period of 3 years.
“One can initiate the annuity purchase option at any time before lapse of 3 years from the date of such deferment, by giving an application or notice to the Central Record Keeping Agency,” it said.
“If no such notice is given before the lapse of 3 years from such date of deferment, the percentage of accumulated pension wealth as provided by the subscriber in the NPS withdrawal application form for purchase of annuity would be automatically monetized and such amount would not earn any investment income or interest to the subscriber thereafter,” it added.
The rule is similar to what EPFO follows for provident fund — the EPFO stops interest payment on “inoperative” accounts where contributions have stopped and the balance amount hasn’t been transferred or withdrawn by the subscriber for over 3 years.
Market fluctuations in the past five years have impacted the net asset value (NAV) of investors’ pension wealth, raising doubts over the prospects of NPS and intensified debate over the merit of a market-linked defined contribution scheme as against the defined benefit schemes of Employees Provident Fund Organisation.
Although PFRDA claims that NPS is offering much superior returns than EPFO, critics including Left parties and trade unions have pointed to the downside risks associated with NPS, especially when majority of investors still lack market intelligence and don’t switch portfolio to avert losses.
Many of the unit-linked insurance plans and mutual fund schemes that follows similar investment patterns of NPS have seen erosion of wealth during the Lehman-crisis.
More recently, share and bond prices have taken a beating after the US Fed announced intention of tapering its bond sale programme as part of a gradual unwinding of easy money policy.
