India pension regulator sees coverage as immediate need

Hemant G. Contractor, New Delhi-based chairman of India's Pension Fund Regulatory and Development Authority, says he'll worry about whether India's citizens are saving enough to live comfortably in retirement another day. For now, he's focused on swelling the ranks of his countrymen putting away any savings at all toward that goal.

"Adequacy at the moment is not the prime concern," said Mr. Contractor, who oversees India's 2.7 trillion rupee ($37.9 billion) National Pension System, which was launched in 2004 as a mandatory defined contribution system for new government employees. Five years later, the mission of the NPS was greatly expanded, positioning the scheme as a voluntary retirement savings vehicle for all Indians, including the multitudes in the informal sectors of the economy.

"Our focus currently is on expanding coverage as much as possible … trying to see that everybody has some pension coverage or the other," he said in a recent interview.

The government has lent NPS and the Pension Fund Regulatory and Development Authority a hand in that regard, offering incentives for lower-income earners to climb onto the retirement savings train.

The NPS Swavalamban program, launched in 2010, offered matching government contributions of 1,000 rupees for people in the unorganized sector of India's economy willing to save between 1,000 rupees and 12,000 rupees a year for retirement. That effort was superceded by the Atal Pension Yojana program, launched in 2015, which offers low-income cohorts who save as little as 43 rupees a month from the age of 18 a lifetime pension in retirement ranging from 1,000 rupees to 5,000 rupees a month. Under the APY program, the government will contribute either 50% of a subscriber's contribution or 1,000 rupees, whichever is lower.

NPS' latest monthly data for November 2018 show the APY program — sold through banks and other channels — adding subscribers at a healthy clip of roughly 450,000 a month over the past year and a half, and closer to 630,000 a month for the 90 days through Nov. 30. That, in turn, has lifted the combined ranks of Indians saving for retirement through those incentive programs to 16.5 million as of Oct. 31 — 69% of NPS' 24.1 million participants.

Efforts to promote regular retirement savings have been aided by parallel campaigns — under the government formed in May 2014 by Narendra Modi — aimed at integrating the country's roughly 1.3 billion people into India's financial system.

The government's "massive campaign" to get people to open bank accounts — adding 340 million new ones over the past five to six years — has greatly enhanced the power of APY's bank-distributed platform, Mr. Contractor said.

That, in turn, has accelerated the growth in the number of low-income earners saving regularly for retirement. "We registered 100% growth last year … and this year (ended Dec. 31, 2018), on a much larger base, we'll probably reach growth of 50% to 60%," Mr. Contractor said.

PFRDA's near-term target is to expand the portion of India's population formally saving for retirement to 25% by March 2021 from about 15% now, he said.

The longer-term goal is to cover everybody, he said.

For now, the sobering flipside to that stellar growth in the number of Indians saving for retirement is the fact that the flood of low-income savers joining NPS account for a mere 3% of NPS' assets, or 84 billion rupees.

By contrast, the mandatory DC contributions made by state and central government employees — a combined 25% of NPS' subscriber base — come to 2.29 trillion rupees, or 85% of the fund's portfolio.

For those public employees, the adequacy of their retirement defined contribution accounts is important, and a sensitive topic for a group that, before NPS was launched in 2004, enjoyed government-guaranteed pensions without having to make contributions, Mr. Contractor said.

With only new government employees joining NPS, it could be 2030 or 2035 before the first class of public employees counting on NPS' market-driven investment options to provide a comfortable retirement will test how well the retirement fund has delivered on that promise, Mr. Contractor said.

Regulatory changes announced in December — boosting government contributions for public employees' retirement accounts to 14% of their salaries from 10% — will help.

Pending changes in the investment constraints governing NPS' public employees' defined contribution scheme could help as well, with PFRDA asking the government to review regulations that require almost 50% of assets to be allocated to government securities and only 15% to equities, Mr. Contractor said. The government agreed to that in early December, and it's likely that during the coming year NPS will offer public employees two lifecycle fund choices, with equity allocations of 25% or 50%, he said.

Another change announced in December — eliminating a residual 20% tax on an individual's withdrawal of his or her NPS retirement savings — could likewise pave the way for some of the more than 60 million private-sector employees with retirement accounts now in India's $135 billion Employees Provident Fund Organization to shift their retirement savings to NPS as well. The EPFO is a combination provident and pension fund, with individual accounts, and a government guaranteed return.

The government previously announced its decision to allow shifts to NPS from the provident fund, but with the latter's tax-exempt status for contributions, investment gains and withdrawals, the fact that NPS account holders faced partial taxes on withdrawals loomed as "the biggest stumbling block" to people considering that move, Mr. Contractor said.

Such a shift would involve giving up a government-guaranteed return on provident fund accounts in pursuit of potentially higher — but more volatile — returns from the NPS' investment program.

Neville Poncha, founder of IntelX Money, an independent, Mumbai-based financial advisory firm, said few EPFO members likely would forgo the relatively attractive rates the government guarantees for EPFO accounts. Still, a growing number could begin making separate allocations to NPS as awareness of that organization's value proposition grows, he added.

Public-sector employees have enjoyed "not bad" average investment returns of roughly 9% a year, noted Mr. Contractor. Provident fund members, meanwhile, have enjoyed government-guaranteed returns in recent years of just less than 9%.

Meanwhile, Mr. Contractor said NPS is likely to continue restricting investments to domestic assets for now.

"Our financial markets are quite big and there's no dearth of investment opportunities yet," he noted.

Should institutional assets in India grow substantially, in relation to the country's GDP, "then possibly we'll have to look at other options" but for now domestic markets can easily absorb buying from NPS and EPFO, he said.

He conceded, however, that one attempt to move beyond investments in plain-vanilla stocks, bonds and government securities — adding options to invest in alternative assets such as real estate investment trusts — have struggled as a result of NPS' domestic focus. "The problem is there are not many issuers of REITs" in India, perhaps one or two, "so it's not really taken off well," he said.