An Initial Analysis of the Atal Pension Yojana

By Vishnu Prasad & Anand Sahasranaman, IFMR Finance Foundation

The Finance Minister, in his budget speech for 2015-16, has announced a new defined benefit pension scheme – Atal Pension Yojanai (APY, henceforth) – for unorganised sector workers who are not covered under any statutory social security scheme. It has been proposed that the existing subscribers of National Pension System-Swavalamban (NPS-S), the extant pension scheme for the unorganised sector, be automatically migrated to the APY unless they voluntarily opt out. Under the NPS-S, launched in September 2010, the Government of India currently contributes Rs. 1000 per year to every subscriber who makes a minimum contribution of Rs. 1000 per year towards building a post-retirement corpus.

The proposed APY differs from the NPS-S in two significant ways. First, the NPS-S is a defined contribution scheme where the subscriber’s contribution is invested in government securities, corporate bonds, and equity instruments-the scheme does not guarantee fixed returns to subscribers. In contrast, the APY is a defined benefit scheme that will provide the subscriber with fixed monthly incomes between Rs.1000 and Rs.5000 based on the respective monthly contribution amounts (which varies by age and saving potential of the subscriber; refer Table 2 below). Second, under the APY, the government will match either 50 per cent of the subscriber’s contribution or Rs. 1000, whichever is lower (initially for a five year period till 2019-20). This paves the way for the creation of a graded matching scheme where subscribers who contribute below Rs. 1000 also receive a (less than equal) matching contribution. For availing the same amount of co-contribution as under the NPS-S, a subscriber will need to contribute Rs. 2000 into APY (Rs. 1000 under NPS-S).

Adequacy of benefit

In order to judge the adequacy of the defined benefit proposed under APY, we compare the proposed benefit to the average monthly expenditure incurred by individuals in the lowest income quintile. Table 1 below presents the average monthly expenditure of an individual in each income quintileii. As the Table shows, the average monthly expenditure of an individual in the first income quintile is Rs. 628. As the APY is designed as a pension scheme for a household, we assume the average monthly expenditure for two people in our analysis.


Table 2 and Table 3 (below) present the defined pension amount (nominal and real) that will be paid to the subscriber and his spouse based on two sets of indicative monthly contributions so as to get nominal defined benefit pay-outs of Rs. 1,000 per month and Rs. 5,000 per month respectively. For example, in order to receive a nominal defined benefit of Rs. 1000 per month at the time of retirement at 60 years (Table 2, Column 4), an 18-year old needs to contribute Rs. 42 per month while a 40-year old needs to contribute Rs. 291 per month. Similarly, in order to receive a nominal defined benefit of Rs. 5000 per month (Table 3, Column 4), an 18-year old and a 40-year old need to contribute Rs. 210 per month and Rs. 902 per month respectively.


Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=116208 and author’s own calculations.

Table 2 and Table 3 also provide, in Columns 5 and 6, the real monthly pensions that households would receive and the shortfall in pension compared to their expenditure needs, which is a more realistic representation of the actual value of money households will actually be able to get. In order to calculate the real value of the pension we present value the cash flows at a discount rate of 5%, which is one per cent higher than the long-term inflation target, set by the Reserve Bank of India. According to the indicative tables, an 18-year old who contributes Rs. 42 per month will result in a real monthly pension of of Rs. 129 for the household. Assuming that the 18-year old’s income falls within the first income quintile, the defined benefit will cover 10.3% of her monthly expenditure. However, even if the 18-year is able to contribute Rs. 210 per month towards pensions, the defined benefit at retirement will yield a real monthly amount of Rs. 644 for the household (equivalent to a nominal monthly pension of Rs. 5,000) and will be sufficient to cover only 51.2% of her monthly expenditure.

Thus, an 18-year old in the first income quintile can hope to cover between 10% and 51% of her monthly expenditure upon retirement by contributing to the scheme. Tables 2 and 3 also make clear that there is a real risk of significant shortfalls for all age-groups, whether they contribute into the nominal defined benefit of Rs. 1,000 or Rs. 5,000.

It should also be noted that if inflation continues to hover around historical inflation of 8%, the defined benefit would cover a much lesser percentage of an individual’s expenditure per annum. For instance, for an 18-year old who contributes Rs. 42 a month, the monthly defined benefit would be sufficient to cover a mere 3.1% of her monthly expenditure upon retirement.

The need for inflation indexation and a more optimal investment mix

If we assume that the government contribution will be discontinued at the end of five years, the annualised rate of return required to guarantee Rs.1000 per month (or Rs.1.7 lakh corpus) for an 18-year old contributing Rs. 42 a month is 7.58%. If we relax the assumption that government contribution will be discontinued and that the matching contribution from the government will continue in perpetuity, the annualised rate of return required to guarantee the defined benefit drops to 6.68%. Depending on the evolution of inflation rates over time, these nominal rates of return could end up resulting in very low real return or even the risk of erosion in capital due to inflation. The APY could benefit from addressing two key design limitations of the NPS-S:

  1. Lack of inflation indexation: In order to ensure that the pension corpus of low-income customers is not eroded over time, the government needs to index both the subscriber contribution and the matching contribution to inflation. Assuming that the matching contribution continues in perpetuity and that the government invests the corpus in the current NPS-S investment mix (upto 85% in government bonds and upto 15% in equity), indexing both the subscriber and government contributions to inflation on an annual basis could provide the subscriber with a substantially higher corpus (as much as 4 times higher than the guaranteed amount). Indexing social security benefits to inflation would also be in line with international best practices. For instance, the US Social Security Administration makes an annual cost of living adjustment by linking social security benefits to the Consumer Price Index.
  2. Conservative investment mix: The current NPS-S investment mix invests upto 85% of the corpus in bonds and upto 15% in equity, the remaining comprising of corporate bonds. In contrast, the NPS-Main follows a life-cycle investment mix which invests 50% of a 20-year old subscriber’s corpus in equity, 30% in corporate bonds, and 20% in government bonds. As the subscriber ages, the share of equity and corporate bonds is reduced and transferred to the less-volatile government bonds. According to our calculations, investing in the life cycle fund mix could provide returns that are 49% higher than the returns on the current NPS-S mix. While guaranteeing a minimum amount through investments in approved fixed income instruments, the government could ensure that subscribers can accumulate corpuses that vastly exceed the guaranteed benefit by shifting to a more equity-heavy investment mix depending on age of the subscriber.

It is indeed heartening that there is a lot of policy attention on these very important questions of old age income security, and the emergence of the NPS and now the APY are testament to this. If some of the design limitations of the NPS-S were to be addressed in the APY, it would mean that the most vulnerable households would be able to build pension corpuses that could meaningfully provide them with old age income security.


i – http://pib.nic.in/newsite/PrintRelease.aspx?relid=116208
ii – This analysis has been performed on data from a financial services firm that is operational across rural districts in three states of India for a sample of over 200,000 households.


Understanding Voluntary Pension Contributions by Informal Sector Workers

Guest post by Renuka Sane, Indian Statistical Institute, New Delhi

Financial inclusion is a priority area in the minds of policy makers in India. The larger focus of this debate has been on access to credit and insurance. Savings products, and long-term pension products have received relatively less attention. It is often assumed that poor people do not have the ability to save towards an illiquid product such as a pension plan. In recent years, several emerging economies including China, Dominican Republic, India, Indonesia, Vietnam, have begun experimenting with some form of Matched Defined Contribution (MDC) pension programs where the government provides an incentive by matching voluntary contributions made by plan members, in an effort to facilitate the build up of pension wealth by informal sector workers.

One instance of a MDC is the NPS-Swavalamban (NPS-S) scheme introduced by the Pension Fund Regulatory Development Authority (PFRDA) in India, in April 2010. In the NPS-S, those in the informal sector can invest amounts as low as Rs.100 to their individual accounts through a network of entities, called aggregators, licensed to undertake outreach, marketing and enrolment functions. To incentivise a minimum yearly contribution, the government agreed to gift Rs.1000 to those accounts that had managed to contribute Rs.1000 or more before the end of each financial year, for the first three years i.e. till March 2014. The scheme was recently extended to 2016-17. In the aggregate, about a million individuals signed up for the NPS-S. The true measure of success of a pension program such as the NPS-S is the persistence of contributions by its customers. The PFRDA has not released information about the aggregate persistence of the million customers who have signed up.

In a recently released research paper we analyse the data of one aggregator, the Kshetriya Gramin Financial Services (KGFS), operating in Tamil Nadu, Odisha and Uttarakhand. KGFS sells a variety of financial products, along with the NPS-S. The paper finds that among the KGFS customer base, around 12 percent, or 37569 individuals, chose to enrol in the NPS-S pensions program by March 2013. These customers are among the poorer people of the total customer base. They tend to have less accumulated wealth and are households in the lower income categories in the data. They are also among the less educated and tend to have poorer socio-economic indicators (such as access to cooking gas and private sanitation) compared to average customer in the sample.

Of those who participate, about 50 percent contributed Rs.1000 in at least one financial year between 2010 and 2013. The persistence has improved for customers who signed up in 2013, relative to those who signed up in 2012. Several customers choose to persist even if they do not contribute upto the Rs.1000 limit in one financial year. Customers who make one large valued transaction are more likely to accumulate the Rs.1000 in one year relative to those who make a small valued transaction. There is thus limited evidence of customers making multiple small valued transactions.

The NPS-S is a relatively young program, and more experience has to build up before we are able to measure the full impact of this scheme. The results in this paper, while localised to a single distributor, do provide evidence that low-income, informal sector workers are interested in illiquid pension accounts. It is also important to note that for several households, the NPS-S is their first foray into formal finance. The participation and persistence, limited as it may seem at present, could be the beginning of more systematic and regular contributions towards a pension account.

This analysis raises pertinent questions on whether the government should continue the subsidy and in what form. For example, the government may choose to dismantle the minimum threshold of Rs.1000 and provide an equal match upto a ceiling, enabling more individuals to benefit from the subsidy. Alternatively, the government may limit the scheme to households who can contribute the minimum amount (of Rs.1000) every year, at least till such time technology can drive down transactions costs and make even lower-valued transactions (i.e. less than the current Rs.100) viable. The costs and benefits of either option need to be considered as a successful implementation has tremendous implications for pension system design, financial intermediation and ultimately financial inclusion.


IFMR Rural Finance appoints Facilitator for NPS-Lite distribution

By Mohan R, IFMR Rural Finance

Given the important role pensions play in the financial well-being of households, NPS-Lite, a pension plan geared towards economically disadvantaged populations, is crucial to achieving complete financial inclusion. It provides a mechanism for households to plan for their retirement years by saving and investing small amounts through their productive life stages.

Being one of the first aggregators appointed by the Pension Fund Regulatory and Development Authority (PFRDA) for the distribution of NPS-Lite, IFMR Rural Finance can appoint facilitators for itself to increase access to NPS-Lite. Correspondingly, to ensure that the selected facilitators are well equipped to distribute the product responsibly, it has also taken the initiative to develop content for creating awareness and providing relevant training that would aid the distribution of the product.

Towards this end IFMR Rural Finance recently completed its second modular replication with an MFI based in Bihar, Saija Finance Private Limited, by appointing it as a facilitator for IFMR Rural Finance; an important initial step towards appointing many other institutions who have shown interest in offering NPS-Lite. IFMR Rural Finance had earlier appointed Care NGO Partners as facilitators for NPS-Lite.

Commenting on being appointed as a facilitator, Purshottam Ranjan, Operations Manager, Saija Finance Private Limited, said “Having launched NPS Lite for pilot-test at our Danapur branch, we have provided exclusive training to our field staff about the product and have been promoting it at group meetings to our clients and non-clients in order to get their feedback and develop strategies based on it. Initially we are promoting the product within 5KM radius of our branch, but hope to expand as we gain experience in distributing it.

Given that access to a complete suite of financial products is key to improving a household’s financial well-being, IFMR Rural Finance hopes to offer consulting/technical assistance/systems and training, that would help a range of institutions distribute mutual funds and insurance, amongst other products, over a period of time.


PFRDA Aggregators’ Meet

By Deepti George, IFMR Finance Foundation

IFMR Finance Foundation worked with Pension Fund Regulatory and Development Authority of India (PFRDA) as Knowledge Partners to help organise their first NPS-Lite Aggregators’ Meet in New Delhi, on 21st November, 2011. The meet brought together aggregators and other stakeholders under one roof, to address issues and concerns faced while distributing NPS-Lite and Swavalamban benefits to their customers.

The Meet was attended by all senior members of PFRDA along with representatives from over 25 different organisations, including Nitin Chaudhary and Anil SG from IFMR Rural Finance who were also part of separate panels. PFRDA used this opportunity to announce a new incentive scheme for the Aggregators where they increased the fixed incentive from INR 50 to INR 100. PFRDA also released new communication material that was designed specific to each aggregator’s need and could be used for creating awareness about pensions, NPS-Lite and Swavalamban benefits.

The Meet kicked off with an opening statement by Mr.P Upadyay, Chief General Manager, PFRDA, and was followed by an overview of the two pension schemes, NPS Lite and Swavalamban, by Ms.Padma Iyer Kaul, Executive Director, PFRDA. She set the tone of the conference by highlighting the importance of pensions and guided the participants in practically addressing the issues they may have with the two schemes. Mr.Yogesh Agarwal, Chairperson, PFRDA, also graced the conference with his presence and thanked the aggregators for their efforts.

The Meet brought critical issues to the table resulting in lively discussions on product design, need for a standardised method of delivery through technology and the inherent necessity for a nation-wide awareness campaign to highlight pensions as an important financial planning tool.

In response to the concerns highlighted, some fascinating suggestions and innovations, few already being implemented by Aggregators, were brought to light. Some of these are:

1) The need to develop communication and marketing collateral that can be deployed to create awareness and educate people on pensions – in order to create the market for pensions
In this context, Nitin Chaudhary, explained the Wealth Management approach of KGFS entities that has enabled it to become the leading aggregator in terms of penetration of NPS Lite. He also shared training materials and flipcharts currently being used at KGFS. South Indian Bank also shared their ideas they had successfully implemented, where they used the NPS-Lite logo on all receipts and envelopes. A few aggregators like Bandhan Financial Services and Department of Women and Child Development (DWCD) had even developed their own passbooks to record transactions and help customers keep track of their contributions.

2) The importance of building technology platforms which help to reduce transaction and process costs along with reducing operational risk
Mr. Amit Sinha, from NSDL suggested that using mobile phones for transactions would encourage portability across aggregators and increase efficiency. It was also suggested that creating applications that could be shared with all Points of Purchase was cost-effective and easy to build, also paving way for inter-operability between aggregators, and across locations. Inter-operability was especially important given that the access to this long-term product must not be aggregator-dependent.

3) Concerns relating to delayed issuance of PRAN (Permanent Retirement Account Number) cards and data errors
IFMR Rural Finance shared its feat of being the first aggregator to generate PRAN directly in collaboration with the CRA (Central Recordkeeping Agency), thereby reducing TAT to less than 24 hours. Data errors could also be minimized by IFMR Rural Finance as the application forms get pre-populated with customer details directly from the Customer Management System rather than by a manual data-entry process.

4) KYC requirements contribute to exclusion of segments of the population, especially the migrant population
Ms. Gayathri of Labour Net suggested that given the essentially floating nature of migrant populations that could potentially enroll for NPS-Lite, a more diverse set of documents could be included for KYC norms to enhance outreach. It was also suggested that a “one-size-fits-all” strategy should not be adopted for the given target population, but rather there is a need to develop different strategies for different segments such as the stable urban poor, the daily wage migrants, seasonal migrants, and so on.

5) Increase benefits and attractiveness of NPS Lite and Swavalamban for the customer
It was suggested by Anil SG of IFMR Rural Finance that NPS-Lite may be clubbed with health insurance products like RSBY to take care of a gamut of eventualities that the individual or household may face, which may otherwise force them to dip into their pension corpus. This would provide customers with multiple benefits, mitigating not only longevity risk but also addressing to an extent, health shocks.

Going forward, IFMR Finance Foundation is drafting a report collating recommendations of participants from the Meet and suggesting ways forward for the NPS-Lite and Swavalamban schemes.


Including Everyone in the National Pension Scheme: Review of the CRIISP Report

By Shweta Aggarwal, IFMR Rural Finance

The Committee to Review Implementation of Informal Sector Pension (CRIISP) recently released their report focusing on National Pension Scheme (NPS), its design architecture, its performance till date and recommendations for increasing outreach and awareness about the product. The committee recognises that the current design of NPS excludes a large part of the population engaged in the unorganised sector. It gives recommendations on different aspects of the product, its cost structure, delivery channels and strategies for marketing and promoting the product to make it more accessible for the end customer.

We go over some of the recommendations and analyse benefits if these do get accepted.

Given all these recommendations, it is important to implement a regulatory framework that addresses cases of mis-selling and aligns distributor incentives with customer incentives, especially when broad basing distributions agents. The report suggests that PFRDA develop this framework based on a code of conduct for NPS distributors. This should be implemented along with other changes to encourage responsible scale-up.

NPS has the potential to meet needs of millions of retirees in India through offering a competitive, fair and convenient savings option. The CRIISP report presents a thorough analysis of the products and the importance of aligning product design and delivery with these needs. We believe if these recommendations are accepted, NPS will be able to effectively address the problem of an ageing population in the Indian context.