The PFRDA Guaranteed Return Plan – another option for savers, the salaried class
India’s pension supervisor and regulator, Pension Fund Regulatory and Development Authority (PFRDA), which operates the National Pension Scheme (NPS), is preparing to launch a guaranteed return scheme, the Minimum Assured Return Scheme (MARS), which will will provide savers and people from the working class with an option for their investments.
What is the PFRDA project?
The regulator has appointed EY Actuarial Services LLP as a consultant to help design the proposed MARS under the NPS. It will be the pension regulator’s first scheme to offer a guaranteed return to investors.
However, only the floor is fixed in the proposed scheme, and the consultant is expected to develop the MARS framework within the next two months. The PFRDA wishes to launch the mechanism before the end of the current calendar year.
What type of return will the scheme provide?
Actual returns will depend on market conditions. Any shortfall will be made up by the sponsor and the surplus will be credited to the account of the subscribers.
Two options are likely to be proposed. Under the fixed guarantee option, the guaranteed return is fixed throughout the accumulation phase. Under the floating collateral option, the guaranteed rate of return is not fixed throughout the savings phase.
The floating guarantee depends on the evolution of the 1-year interest rate until retirement. The current one-year interest rate is attributed to each annual contribution paid and is valid until retirement, so that at each moment there is a different minimum return.
This is similar to the ATP system in Denmark, where 80 percent of dues are guaranteed based on the rates the ATP can obtain in the market when dues are paid, according to a PFRDA document.
Will there be a blockage?
Under the current regime, locking-in can apply to each contribution and will be applied based on the period since that contribution was made. They may also consider multiple lock-in period options (or staggered warranty periods) for added flexibility.
Withdrawals are likely to be directly linked to the blocking period. The subscriber may have the option of withdrawing or retaining their investment after the lock-up period. However, no guarantee will be applied on the investment after the blocking.
Minimum and maximum monetary limits on contributions may be prescribed. The attraction for investors will be the guaranteed minimum return.
How big is the asset now?
Assets under management of NPS was Rs 6,85,745 crore as of January 31, 2022 with a subscriber base of 1.53 crore. Its assets are expected to touch Rs 7 lakh crore by the end of March. The NPS is a voluntary defined contribution retirement savings plan designed to enable subscribers to make the best decisions for their future through systematic savings throughout their working lives.
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