The NPS tragedy

The new Unified Pension System results from two decades of lost opportunity in the NPS.

The government has just announced a new scheme called the Unified Pension Scheme, a modification of the NPS meant only for government employees. Shorn of the cloud of verbiage surrounding this new scheme, it essentially re-injects an element of guaranteed pension into the post-retirement earnings of government employees.

In theory, this new guaranteed pension is optional, and employees can opt for the NPS. For all practical purposes, the NPS is now dead as far as government employees go.

Here's a simple truth: If the National Pension System had been implemented right from 2004 in the spirit it had been designed, then pre-2004 government employees (still on the old system) would have been agitating to be shifted to the NPS. Why? By now, it would have become clear that the NPS would easily provide 300-400 per cent higher pensions than the old system!

In its conceptualisation, the NPS works wonderfully if, and only if, a substantial part of the money has been invested in equity assets. In other words, it would have resulted in higher - much higher - pensions if the massive growth of the Indian economy had been channelled through the stock markets into the NPS and then into pensions. In 2004, when new government employees were put on to NPS, the Sensex was at about 2,000. Today, it's at about 80,000. All this has been effectively wasted as far as pensions go.

It has been wasted in two ways. First, the investment part of the NPS was not done at all from 2004 to 2009. The money just languished at the normal government securities rate. Then, after that, the maximum equity exposure was held to a ridiculous 15 per cent by default. The irrational yet institutionalised fear of equity that is endemic has scuppered any chance that the NPS had.

I'm sure there are still some government employees - no matter how few - who understand all this. For them, there's a simple option for realising the gains that will get them much higher pensions than the UPS can. Once your money is deployed into the NPS, you can access your account directly to the CRA website and opt for the highest equity option. Ideally, this should be done at least till the age of 50. Ideally, this should have been the default option.

If one does any kind of root cause analysis of why all these happened, then the current state of politics and the mindset of the government employee must also take the blame. However, what is done is done; there's no point in building these alternative history scenarios now.

As far as non-government members of NPS go, the lesson is clear: NPS is a great retirement system, but to gain the maximum benefit possible, one must maximise equity exposure for as long as possible. Of course, that's true of ALL long-term investing, not just NPS.

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??More columns by Dhirendra Kumar: vro.in/stories/type/33/first-page/