Nation Pension System AUM likely to rise 30% to Rs 7.5 lakh crore by FY22, says PFRDA chairman, BFSI News, ET BFSI

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Pension Fund Regulatory and Development Authority (PFRDA) Chairman Supratim Bandyopadhyay on Friday said that the corporate sector is showing greater interest in the National Pension System (NPS), which may lead to an on-year 30% rise in assets under management (AUM) on year to Rs 7.5 lakh crore by FY22.

Other key takeaways from the speech

  • Total NPS corpus was at Rs 6.67 lakh crore as on September 25, 2021, up from Rs 5.78 lakh crore as on March 31.
  • Private individual enrolments (excluding Atal Pension Yojana) grew 35% on year to 18.28 lakh as on September 25, 2021, while corporate sector subscribers have shown 20% growth to 12.59 lakh during the period.
  • The Central government employee subscribers grew 4.4% on year to 22.24 lakh as on September 25, 2021, while state governments subscribers grew 10% to 53.79 lakh during the period.

Addition of new fund managers

PFRDA has recently given approval to two new entrants – Tata Asset Management and Max Life Insurance – into fund management of NPS. Axis Mutual Fund is also in the process of joining as a fund manager, Bandyopadhyay said.

Currently, there are seven fund managers – HDFC Pension Management, ICICI Prudential Pension Funds Management Company, Kotak Mahindra Pension Fund, LIC Pension Fund, SBI Pension Funds, UTI Retirement Solutions and Aditya Birla Sun Life Pension Management.

Individual Subscribers

In June, PFRDA permitted the engagement of individuals who are working as business correspondents or agents within their existing business structure for facilitating the distribution of pension schemes.

Bandyopadhyay said individual distributors would play a key role in the expansion of NPS among the masses. The regulator is also examining if the fees paid to distributors could be enhanced from the current rate of 0.25% of the contribution by a subscriber.

With longevity of life and working life going well beyond 60 years, the regulator has enhanced the entry age for NPS to 70 from 65 and exit age from 70 to 75 years, in all citizen and corporate schemes.



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PSBs may have to provide for over Rs 21,000 crore annually for family pension revision, BFSI News, ET BFSI

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Public sector banks will have to make an additional provision of over Rs 21,300 crore annually on account of a hike in family pension and higher contribution toward the National Pension System (NPS), according to a report.

A special dispensation will be sought from the Reserve Bank of India (RBI) to allow provisions over the next five years, it said.

The plan

Acknowledging that family pension for bank employees is at a paltry level, the government this week had announced that it would raise the same to 30% of the last drawn salary.

Earlier, kin of a deceased PSB employee used to get a maximum of Rs 9,284 per month as a family pension, said Department of Financial Services Secretary Debasish Panda.

“The cap has been completely removed and a uniform slab of 30% at the last-drawn salary will be entitled as family pension,” Panda told reporters here, admitting that the earlier levels were “paltry”.

NPS hike

Similarly, the ministry has also decided to increase the employer’s contribution to the New Pension Scheme (NPS) to 14% of the salary from the current 10%, he said.

Finance Minister Nirmala Sitharaman expressed her satisfaction at public sector banks’ performance in the past few years and appreciated that many of them have come out of the RBI’s prompt corrective action framework.

Panda said a dozen PSBs have become leaner and started delivering profits which have upped the investor confidence in them and made them self-dependent for capital raising.

He said that since last year, the banks have collectively raised over Rs 69,000 crore, including Rs 10,000 crore in equity, and are in the process of raising another Rs 12,000 crore at present.

As on March 31, the total number of pensioners stood at around 5.66 lakh and family pensioners at over 1.55 lakh.



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Are NPS equity funds finally bringing cheer to investors?

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The National Pension System (NPS) marks another anniversary since opening up for all citizens in May 2009. At this juncture, an assessment of the performance of different investment options under NPS shows that growth investing and high risk appetite seem to have paid off for investors over the long term. The market rally in the last year has played its part too, in pushing up returns in the equity (Scheme E) option under NPS in the short term. The performance of NPS funds over various time periods can be seen in the accompanying table.

Equity wins….

The average returns of Tier I Scheme E funds has outperformed government securities (Scheme G) and other fixed income instruments (Scheme C) over one-, five- and ten-year time frames. But Scheme E under-performed in the three-year period, where government securities (G-Secs) and other fixed income instruments still hold an edge. But NPS being a long-term investment with restricted withdrawal options, investors can depend on equity to deliver the goods, show the numbers.

Scheme E of NPS has also beaten the relevant mutual fund category (large-cap) funds by 90-430 basis points in 1-, 3- and 5-year periods. Even on a ten-year basis, they are almost at par with mutual funds, lagging the average large-cap MF returns by just 35 basis points. One basis point is one-hundredth of a percentage.

Under the ‘Active’ choice, investors can allocate up to 75 per cent in Scheme E up to the age of 50. Under the ‘Auto’ choice, Scheme E allocation ranges from 5 to 75 per cent based on your age and option chosen (conservative, moderate or aggressive).

….But not enough alpha

There are 7 pension funds (HDFC, ICICI, Kotak, LIC, SBI, UTI & Aditya Birla Sun Life) for the All Citizens Model.

After eating humble pie for some years, investors with a majority of their NPS exposure to equities now can smile. Scheme E invests predominantly in large-cap stocks and its average returns are now better than those of large-cap funds and the BSE 100 TRI. While the polarised market conditions until early 2020 and the sharp fall in February-March 2020 previously dented the performance of Scheme E funds, the rebound last year has taken everybody by surprise.

NPS equity funds may have done well in comparison to relevant mutual funds . But there is room for improvement in terms of alpha (i.e. excess return over benchmark BSE 100 TRI). Over the one-year period, only one among the seven Scheme E funds has beaten their equity benchmark. Over 3-, 5- and 10-year periods, alpha remains weak. One can, of course, argue that large-cap funds, even in MFs, have lagged benchmarks.

The poor alpha generation track-record of NPS equity funds is in contrast to Scheme G and Scheme C funds. Despite G-Secs and other fixed income instruments at this moment losing sheen to equity, they boast of better alpha. All the Scheme G funds have outshined their relevant benchmark across all periods. Scheme C funds have lagged their relevant benchmark in 1- and 3-year periods, but returns are at par in 5- and 10-year periods. Like NPS equity funds, Scheme G and Scheme C funds show comprehensive out-performance over average returns of equivalent mutual fund categories (gilt, medium to long and long duration mutual funds). Scheme G funds took advantage of the fall in long-term bond yields in 2014, 2016 and 2019 to clock good returns. Investing in G-Secs today may lead to lower returns in the short- to medium-term, but with NPS being a long-term investment, returns smoothen out. Also, Scheme G carries near zero default risk.

Scheme C carries slightly higher risk than Scheme G, though funds invest over 80 per cent in AAA-rated bonds. Scheme C funds have not been immune to the turmoil in the corporate bond market. However, over the long term, small losses from such events could be compensated to a good extent by capital appreciation.

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Save smart: Know these three different ways to invest in NPS

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The National Pension System (NPS) has been witnessing good growth in number of subscribers on account of market-linked return potential, freedom to choose between different asset classes and the additional tax-saving benefit of up to ₹50,000 on annual investments in Tier 1 NPS account.

With the financial year about to end, subscribers may be searching quick ways to invest in NPS. Apart from the usual routes that DIY investors can utilise for NPS investments, there is a facility called D-Remit (Direct Remittance) that can be a handy tool for investors looking to get same-day NAV (net asset value).

POP-SP

First, subscribers can deposit their subsequent contributions at any Point of Presence Service Provider (POP-SP) or Nodal Offices of the NPS, either in cash or by cheque. POP-SPs are banks or other firms that provide services under NPS through their network.

While the minimum amount stipulated per contribution is ₹500 and ₹250, for tier 1 and tier 2 accounts, respectively, there is no cap on the maximum amount of contribution (for both the accounts). However, those depositing contributions in excess of ₹50,000 using cash are required to submit KYC documents to the POP-SP.

Note that the minimum contributions mentioned above are for subsequent contributions only. For the initial contribution at the time of registration, one needs to contribute at least ₹500 and ₹1,000 in tier 1 and 2 accounts, respectively.

While the NPS units shall be allotted two days after the funds are credited to the trustee bank of NPS, the contributions made through nodal offices or POP-SP may take time to get credited to the trustee bank (delays can be due to deposit of cash collected and cheque clearance).

e-NPS

Secondly, contributions through eNPS (through the e-NPS website or using the mobile application) — made through net banking, debit card, credit card or UPI — are also credited to your NPS account on a T+2 basis.

Compared with deposit of cheques or cash, online payment methods cause fewer delays in fund clearance.

D-Remit

However, with the end of the financial year approaching fast, subscribers may prefer to make their contributions using a much faster mode. This is where the direct remittance facility launched by NPS in October 2020 is more useful. D-Remit is an electronic system through which money can be directly transferred from your bank account to the trustee bank so that you can get same-day NAV for your NPS investment.

Subscribers only need to have a virtual id with a trustee bank to use D-Remit, used only for the purpose of remitting NPS contributions. The id can be created on the CRA (Central Recordkeeping Agency) websites. NPS customers can go to either of these two links to create virtual ids: tinyurl.com/dremit1, tinyurl.com/dremit2.

After this, the subscriber needs to carry out virtual account registration using the Permanent Retirement Account Number (PRAN).

The creation of the account may take up to one working day. A confirmation on activation is sent via mail and SMS. In case, you are using the D-Remit facility for both the tiers, two separate virtual accounts are created. Subscribers won’t incur any additional costs for creating the ids.

Next, you will have to login to the net banking facility of your bank and add the virtual account generated as a beneficiary account, along with your name as per CRA records, as the beneficiary’s name. The IFSC code for the virtual id shall be UTIB0CCH274. After adding the beneficiary, funds can be remitted using RTGS/NEFT/IMPS modes.

Those who wish to get the-same day NAV will have to make the contributions before 9. 30 am (on a working day). The minimum contribution through D-Remit is ₹500 for both tier 1 and tier 2 accounts, while there is no cap on the maximum contribution.

Investors must note that akin to mutual funds, one can make lumpsum contributions or opt for Systematic Investment Plan (SIP) in NPS as well. You can also set a standing instruction through the same internet banking login for investing a specified amount at regular intervals in your NPS accounts, to the beneficiary added (virtual ids).

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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Financial planning: Striking a work-life balance

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Sundar, aged 39, under stress due to his employment, was desperate to quit. His wife, Nandini, aged 37, was not earning.

. Sundar wanted to set aside an emergency fund for medical needs. He also wanted to gradually liquidate a few investments to support his expenses till he got employed in a relatively less-stress job. He also was inclined to venture on his own as an alternative.

Sundar wanted to protect his commitment towards the education of his son, aged 11. . His net worth and annual cash flows are mentioned in the accompanying tables.

Goals

After a detailed discussion, the goals were redefined as follows. An emergency fund of ₹16 lakh was to be maintained. The housing loan was to be foreclosed in the next 5- 7 years. Sundar also wanted to accumulate ₹ 30 lakh at current cost for his son’s education that would fall due in 2026; at 10 per cent inflation, the cost worked out to about ₹ 53 lakh.

Sundar wanted to retire at his age of 50. The life expectancy for him and his spouse was up to age 90. The retirement expenses were found to be ₹40,000 a month. Considering 6 per cent inflation over the years, it amounted to about ₹76,000 a month at age 50; this warranted a corpus of ₹ 2.91 crore at retirement.

As Sundar wanted to settle in his home town, we suggested that he dispose both the houses in Bengaluru. With the proceeds, he could buy a farmland and a house in his home town for a comfortable retired life.

In addition to the retirement corpus, Sundar wanted to build a wealth corpus of ₹2 crore to provide for his travel, health and other needs post retirement.

We assessed Sundar’s risk profile as ‘growth- oriented’. His current asset allocation was almost equally split between equity and debt including his RSU (restricted stock units) holdings.

He was saving regularly in a ratio of 60:40 in equity and debt. We recommended the same allocation ratio for his future savings and investments.

Recommendations

We advised Sundar to tag ₹16 lakh of his fixed deposits as his emergency fund. Another ₹ 2 lakh can be tagged as a fund towards career growth. We recommended that Sundar invest ₹8 lakh and tag his current mutual fund holdings of ₹7 lakh to his son’s education. This would fetch him a corpus of about ₹ 26.5 lakh in six years. He was advised to invest ₹ 30,000 per month to manage the deficit — staying with large cap funds for the equity allocation and short -term funds for the debt allocation. Sundar could expect to generate a corpus of ₹ 2.2 crore from his current holdings of EPF (Employees’ Provident Fund), PPF (Public Provident Fund) and RSU and his regular contribution to PF and PPF. To fund the deficit in the retirement corpus, we advised him to invest ₹ 31,000 per month in 70:30 allocation in equity (using a combination of large- and mid-cap funds) and debt (through National Pension System).

Sundar had been investing ₹50,000 per month in his RSU through his voluntary savings and RSU allotments every year. As he did not plan to continue with the current employer, we recommended not to tag such savings. We advised him to increase his loan repayment by ₹ 25,000 per month. This will help him close his housing loan in 5.5 years, and save interest cost of about ₹ 10 lakh as well.

Sundar would have to invest about ₹10 lakh per annum to get another ₹ 2 crore as wealth corpus at his retirement. He was not in a position to commit this amount now. But with his earning potential, he would be able to invest later. The loan repayment and his son’s school fees will stop after six years. This should also help him accumulate the desired corpus.

We also advised Sundar to opt for ₹1.5 crore pure term life insurance for himself and ₹10 lakh health insurance for his family immediately.

Sundar’s disciplined savings and investments over the years made it possible to achieve his desired work-life balance.

The writer is an investment advisor registered with SEBI and Co-founder of Chamomile Investment Consultants, Chennai

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