National Pension System fails to take off as returns dwindle

 It's been touted as a long-term financial instrument for your old age security but if returns are anything to go by, the trends from National Pension System (NPS) are not comfortable, at least at the moment.



According to the latest data released by the government in Parliament on Tuesday, return on investment is as low as 1.8% in case of those private sector employees, who opted for investments in government securities, the safest of the categories.



At the highest level, schemes in this segment offered 12.5% return for the period 2009-10 to 2010-11. Minister of state for finance Namo Narain Meena did not elaborate on the reason for the low return of 1.8%, which is at least five times lower than the inflation rate of close to 9%.



A fund manager for NPS, however, said the returns were linked to the fall in the value of bond portfolio. Fund managers have to use the market value of the bonds while calculating the value of their holdings.



At the same time, fund managers said the returns were applicable for one of the schemes under Tier 1 and pension plans typically have a tenure of 20-25 years if not more. Over a longer period of time, the returns are going to be decent, they said. Corporate bonds, supposed to be second safest instrument after government bonds, offered returns of 4-13% between 2009-10 and 2010-11.



This again was due to the erosion in the value of the securities. Although stock market indices have had a roller-coaster ride over the last two years, equities have offered the best return of 8%-26% during this period. Amid fears that people would lose money, the government had capped investment in equities at 50% of the investment that a person makes in NPS.



NPS subscribers have two investment options. First they have to open a Tier-1 account where the money is locked in and on attaining the specified age an investor can withdraw 40% of the corpus, while the remaining 60% has to be used to purchase a pension plan.



There is also a Tier-2 option where funds can be withdrawn whenever an investor wants to. It is optional for individuals working in the private sector to subscribe to NPS but it is mandatory for those who joined the central government from January 2004 to opt for the contributory pension plan.



The performance of the three pension fund managers for the central government employees indicate that the returns on subscribers' contributions under NPS ranged between 8% and 16% during 2008-09 and 2010-11.



Courtesy:ET