The consultation paper by PFRDA proposes enhancements to the National Pension System (NPS) with a focus on flexibility, predictability, and assurance in retirement income. It introduces three pension scheme models addressing gaps in the current NPS framework, which emphasises corpus accumulation but leaves income adequacy and certainty unresolved.
PFRDA has sought suggestions from academics, pension funds and other stakeholders on its consultation paper. PFRDA says that the current NPS is a transparent, mark-to-market defined contribution pension scheme that emphasises fiscal prudence and the accumulation phase. However, from the subscribers’ perspective, it leaves certain key questions unanswered, viz., adequacy of corpus and predictability of retirement income due to factors like market volatility, contribution persistency and investment choices, PFRDA says in its consultation paper.
"To address these points, PFRDA has developed a consultation paper for offering schemes of pension funds and covering both accumulation and decumulation phases," says PFRDA.
"The aim is to generate interest for deliberations amongst the academics, pension funds and other stakeholders to come out with suggestions for the development of the pension market in India."
Let's see what the three types of proposed NPS pension schemes are and how they would work.
PFRDA proposes 3 NPS pension schemes
Scheme-1 blends a step-up Systematic Withdrawal Plan (SWP) with annuity for higher flexibility but no guarantees.
Scheme-2 provides assured target pensions indexed to inflation using Cost Neutral Contribution (CNC) and Liability Driven Investment (LDI) strategies.
Scheme-3 pioneers “Pension Credits,” a goal-based framework where each credit assures a fixed payout, promoting transparency, predictability, and potential tradability in secondary markets.
A. Pension Scheme-1- Desired Pension through mix of Step-up SWP and Annuity
The scheme operates within the NPS framework without assurance of pension wealth and/or benefits.
The scheme allows subscribers to define their “Desired Pension,” with a fixed Indicative Contribution (IC) that remains unchanged unless the subscriber opts to increase their pension target.
The proposed scheme requires a minimum accumulation phase of 20 years, with no upper limit, provided the subscriber is at least 18 years old at the time of entry.
The NPS scheme would follow the Balanced Life Cycle investment pattern, with 50% equity exposure until age 45, tapering thereafter. Pension funds retain flexibility to determine the investment mix in line with the current Investment guidelines.
The scheme provides payouts through an initial monthly Systematic Withdrawal Plan (SWP) at 4.5% of the corpus annually (divided by 12), increasing by 0.25% each year for 10 years, followed by an annuity purchased at age 70.
The annuity is payable for 20 years certain and thereafter as long as the annuitant is alive. If the subscriber predeceases their spouse after age 70 but before 90, the pension continues to the spouse or children until the subscriber’s 90th birthday.
B. Pension Scheme-2 Desired Pension Benefit along with Periodic Inflation Adjustment
The scheme operates within the NPS framework with assurance of pension wealth and/or benefits.
PFDRA says it would enable subscribers to define a “Target Pension,” paid in the first 12 months post-retirement, with annual inflation adjustments based on the Consumer Price Index for Industrial Workers (CPI-IW), capped at a 0% floor for negative inflation scenarios, for the period after the first 12 months.
Requires a monthly Cost Neutral Contribution (CNC), fixed once determined, with an additional 10% buffer to mitigate underfunding risks.
The scheme specifies a decumulation phase of 25 years; upon the subscriber’s death, the inflation-adjusted pension passes to the spouse, then to family members per NPS (Exit and Withdrawal) Regulations.
The scheme mandates a minimum accumulation phase of 20 years, with no upper limit, provided the subscriber is at least 18 years old at entry.
The proposed pension scheme utilises the Balanced Life Cycle investment pattern during accumulation, post which, the corpus is split into two pool schemes: Pool Scheme 1 (focused on fixed pension, invested in Government Securities and high-rated Corporate Bonds) and Pool Scheme 2 (for inflation adjustments, with up to 25% equity exposure for growth).
It may employ held-to-maturity (HTM) valuation to insulate the portfolio from external market events and uses liability-driven investment (LDI) strategies during decumulation to manage risks.
C. Pension Scheme-3- Providing Assured Desired Pension through Pension Credits
The proposed pension scheme introduces “Pension Credits,” where each credit guarantees Rs 100 per month post-maturity for a fixed period (e.g., 1, 3, or 5 years).
The scheme requires subscribers to provide inputs on the year of retirement, target pension amount and scheme choice (aggressive: 75% equity; moderate: 50% equity; conservative: 25% equity; debt-focused: mix of corporate bonds and government securities).
The pension scheme prices credits based on the Present Value (PV) of monthly payouts, discounted at a projected long-term rate of return; pricing varies by purchase timing and includes Performance Levered Price (PLP) and Risk-Adjusted Price adjustments.
It limits accumulation to a maximum of 15 years and decumulation to 1–5 years; credits are managed through pool schemes using HTM or mark-to-market accounting, with no NAV or units allocated to subscribers.
The NPS scheme allows pension funds to issue credits for up to 20 maturity periods (e.g., CY2030–CY2050), with each credit maturing in a specific calendar year to commence payouts in January of the following year.
It proposes a potential secondary market for trading pension credits to enhance flexibility and accessibility.
For the said purpose, the following standard nomenclature for Pension Credits issued by a PF can be followed-[PF Name].[year of maturity].[Scheme- A (Aggressive); M (Moderate); C (Conservative); D (Debt focused)].[Post-maturity payout period].
Thus, a Pension Credit issued by PF1 for a 2040, 5-year payout, investing in Aggressive scheme can be named as- PF1.40.A.5; a Pension Credit issued by PF2 for a 2040, 3-year payout investing in Conservative scheme can be named as- PF2.40.C.3 and a Pension Credit issued by PF3 for a 2040, 1-year payout investing in a debt-focused scheme can be named as- PF3.40.D.1.
PFRDA has sought suggestions from academics, pension funds and other stakeholders on its consultation paper. PFRDA says that the current NPS is a transparent, mark-to-market defined contribution pension scheme that emphasises fiscal prudence and the accumulation phase. However, from the subscribers’ perspective, it leaves certain key questions unanswered, viz., adequacy of corpus and predictability of retirement income due to factors like market volatility, contribution persistency and investment choices, PFRDA says in its consultation paper.
"To address these points, PFRDA has developed a consultation paper for offering schemes of pension funds and covering both accumulation and decumulation phases," says PFRDA.
"The aim is to generate interest for deliberations amongst the academics, pension funds and other stakeholders to come out with suggestions for the development of the pension market in India."
Let's see what the three types of proposed NPS pension schemes are and how they would work.
PFRDA proposes 3 NPS pension schemes
Scheme-1 blends a step-up Systematic Withdrawal Plan (SWP) with annuity for higher flexibility but no guarantees.
Scheme-2 provides assured target pensions indexed to inflation using Cost Neutral Contribution (CNC) and Liability Driven Investment (LDI) strategies.
Scheme-3 pioneers “Pension Credits,” a goal-based framework where each credit assures a fixed payout, promoting transparency, predictability, and potential tradability in secondary markets.
A. Pension Scheme-1- Desired Pension through mix of Step-up SWP and Annuity
The scheme operates within the NPS framework without assurance of pension wealth and/or benefits.
The scheme allows subscribers to define their “Desired Pension,” with a fixed Indicative Contribution (IC) that remains unchanged unless the subscriber opts to increase their pension target.
The proposed scheme requires a minimum accumulation phase of 20 years, with no upper limit, provided the subscriber is at least 18 years old at the time of entry.
The NPS scheme would follow the Balanced Life Cycle investment pattern, with 50% equity exposure until age 45, tapering thereafter. Pension funds retain flexibility to determine the investment mix in line with the current Investment guidelines.
The scheme provides payouts through an initial monthly Systematic Withdrawal Plan (SWP) at 4.5% of the corpus annually (divided by 12), increasing by 0.25% each year for 10 years, followed by an annuity purchased at age 70.
The annuity is payable for 20 years certain and thereafter as long as the annuitant is alive. If the subscriber predeceases their spouse after age 70 but before 90, the pension continues to the spouse or children until the subscriber’s 90th birthday.
B. Pension Scheme-2 Desired Pension Benefit along with Periodic Inflation Adjustment
The scheme operates within the NPS framework with assurance of pension wealth and/or benefits.
PFDRA says it would enable subscribers to define a “Target Pension,” paid in the first 12 months post-retirement, with annual inflation adjustments based on the Consumer Price Index for Industrial Workers (CPI-IW), capped at a 0% floor for negative inflation scenarios, for the period after the first 12 months.
Requires a monthly Cost Neutral Contribution (CNC), fixed once determined, with an additional 10% buffer to mitigate underfunding risks.
The scheme specifies a decumulation phase of 25 years; upon the subscriber’s death, the inflation-adjusted pension passes to the spouse, then to family members per NPS (Exit and Withdrawal) Regulations.
The scheme mandates a minimum accumulation phase of 20 years, with no upper limit, provided the subscriber is at least 18 years old at entry.
The proposed pension scheme utilises the Balanced Life Cycle investment pattern during accumulation, post which, the corpus is split into two pool schemes: Pool Scheme 1 (focused on fixed pension, invested in Government Securities and high-rated Corporate Bonds) and Pool Scheme 2 (for inflation adjustments, with up to 25% equity exposure for growth).
It may employ held-to-maturity (HTM) valuation to insulate the portfolio from external market events and uses liability-driven investment (LDI) strategies during decumulation to manage risks.
C. Pension Scheme-3- Providing Assured Desired Pension through Pension Credits
The proposed pension scheme introduces “Pension Credits,” where each credit guarantees Rs 100 per month post-maturity for a fixed period (e.g., 1, 3, or 5 years).
The scheme requires subscribers to provide inputs on the year of retirement, target pension amount and scheme choice (aggressive: 75% equity; moderate: 50% equity; conservative: 25% equity; debt-focused: mix of corporate bonds and government securities).
The pension scheme prices credits based on the Present Value (PV) of monthly payouts, discounted at a projected long-term rate of return; pricing varies by purchase timing and includes Performance Levered Price (PLP) and Risk-Adjusted Price adjustments.
It limits accumulation to a maximum of 15 years and decumulation to 1–5 years; credits are managed through pool schemes using HTM or mark-to-market accounting, with no NAV or units allocated to subscribers.
The NPS scheme allows pension funds to issue credits for up to 20 maturity periods (e.g., CY2030–CY2050), with each credit maturing in a specific calendar year to commence payouts in January of the following year.
It proposes a potential secondary market for trading pension credits to enhance flexibility and accessibility.
For the said purpose, the following standard nomenclature for Pension Credits issued by a PF can be followed-[PF Name].[year of maturity].[Scheme- A (Aggressive); M (Moderate); C (Conservative); D (Debt focused)].[Post-maturity payout period].
Thus, a Pension Credit issued by PF1 for a 2040, 5-year payout, investing in Aggressive scheme can be named as- PF1.40.A.5; a Pension Credit issued by PF2 for a 2040, 3-year payout investing in Conservative scheme can be named as- PF2.40.C.3 and a Pension Credit issued by PF3 for a 2040, 1-year payout investing in a debt-focused scheme can be named as- PF3.40.D.1.
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