Two-year delay can reduce young investors’ retirement savings by Rs 1.1 crore: ICICI Pru Pension Fund CEO

While the National Pension System (NPS) is a robust and lucrative investment avenue that provides safety, flexibility, tax advantage, and a reliable return on investment, it isn’t necessarily the first choice for retirement investing for many individuals. However, investing in the NPS has a string of advantages. 

In an interview with BT, Sumit Mohindra, Chief Executive Officer of ICICI Prudential Pension Funds Management Company Limited, talks about how well-prepared Indians are for retirement and the key factors influencing their preparedness. Edited excerpts:   

 

 

BT: How do the changes in the investment guidelines impact NPS subscribers?  

SM: The investment guidelines have been relatively stable over the past few years. The last major change was in mid-2021 when the regulator expanded the investment universe for the equity schemes to the Top 200 stocks in terms of market capitalisation. This ensured that NPS subscribers benefit from investing in top-quality mid-cap stocks as well. In the case of debt schemes, subscribers can choose to invest in either government securities or corporate bonds. The regulator has also enabled investments in alternate assets like REITs and InvITs through Scheme A, where subscribers can invest up to 5 per cent of their AUM. On an overall basis, the investment guidelines of NPS have been stable while ensuring that subscribers do not miss out investment opportunities in diverse asset classes. These guidelines, coupled with the safety of investments being allowed in a certain quality of assets, ensure that subscribers' money is safe while still giving the opportunity to get the maximum out of their investments. 

BT: In your opinion, how well-prepared are Indians for retirement, and what are the key factors influencing their level of preparedness?  

SM: Retirement preparedness in India is a complex landscape. While there's been a gradual shift towards financial assets, indicating increased financial literacy and awareness, a significant portion of the population still lacks adequate retirement savings. When people polled in a survey some years ago were asked about retirement planning, a staggering 44 per cent said that they do not expect to retire. They agreed with the statement that said, ‘I have not thought about retirement because people like me cannot retire from work’. Another 33 per cent said there was no retirement plan. These people agreed with the statement: ‘I know I will have to retire one day but I have not given it much of a thought’. These findings point to the challenges being faced. India’s elderly population is expected to reach 194 million by 2031 as per the Elderly in India Report by the National Statistical Office. 

Though the pension asset size is growing substantially and is expected to reach Rs 65 lakh crore by 2025, suggesting a positive outlook, the gap between what is required is still quite high. Imagine this scenario: if an individual starts contributing Rs 10,000 monthly to his or her retirement fund at the age of 25, as opposed to starting at 27, a simple delay of two years can lead to a substantial difference of Rs 1.1 crore in their retirement savings. This underscores the critical significance of early and consistent retirement planning to ensure financial security. 

BT: What compelling reasons would you offer to individuals planning their retirement to opt for NPS over other available financial products?   

SM: With a diverse range of investment options, professional fund management and the unique advantage of low charges, NPS offers compelling reasons for retirement planning. NPS stands out as the lowest-cost investment product available, ensuring efficient growth of savings. Moreover, it provides tax benefits under both the old and new tax regimes, allowing individuals to optimise their tax liabilities. Also, it offers flexibility in choosing the fund manager, investment choices and annuity options. This can be carried across employers. Besides, individuals can stay active by making a lump sum or systematic contributions, making it a versatile and attractive option. 

To illustrate the advantage of low charges, consider this example: If an individual chooses not to invest in NPS due to concerns about mandatory annuitisation and taxable annuity and instead opts for another instrument with an annual charge of around 2 per cent, assuming the same annual growth of 8 per cent, NPS could yield 1.6 to 1.7 times the amount of the other instrument over 30 years (NPS has consistently delivered impressive returns, with an average annual return of more than 13 per cent over the last decade). Even with 60 per cent of the corpus being tax free on maturity, NPS offers a higher lump sum, making the annuity effectively free. This proposition surpasses other options and addresses concerns about taxation and annuitisation. 

BT: What can the regulator and PFMs do to encourage younger customers to open NPS accounts?   

SM: To engage younger customers with NPS, the regulator and PFMs can formalise ‘NPS with SIP’ for easier small-sum savings. It’s essential to communicate that NPS offers long-term, cost-effective savings with the potential for significant growth. Conducting NPS awareness campaigns for non-government and unorganized sector employees is critical. 

Alignment of NPS investment methods with mutual funds simplifies decision-making. An efficient, secure app-based onboarding process with multi-layer security ensures accessibility for tech-savvy young investors. These measures encourage younger individuals to view NPS as a valuable long-term savings and retirement planning option. Also, the younger generation is looking for convenience, experience and speed. Based on this, the onboarding process should be designed in such a way that it ticks all these boxes if younger customers need to be brought onboard. 

BT: What initiatives are being implemented to increase overall financial literacy and awareness about NPS?   

SM: We are committed to enhancing financial literacy and NPS awareness through a range of initiatives. In addition to our collaboration with educational institutions and provision of online resources, we employ various approaches to reach diverse audiences. This includes the celebration of NPS Diwas in partnership with PFMs and PFRDA on October 1 every year to highlight NPS benefits and the importance of retirement planning. Furthermore, we conduct dedicated corporate awareness programs, encouraging companies to adopt NPS as a part of the overall employee benefit program and being a responsible employer by getting employees to start planning for retirement. For existing corporate partners, we regularly host online and offline sessions. Our efforts extend to popular social media platforms like LinkedIn and Instagram, ensuring a broader outreach and reinforcing the significance of sound retirement planning practices. Recently, the regulator had allowed onboarding insurance agents, MF agents and BCs for promoting NPS. 

BT: How has your AUM grown over the last 3-5 years?  

SM: Our assets under management (AUM) have grown significantly over the last 3-5 years. In FY19, our AUM stood at Rs 3,475 crore. Fast forward to March 2023, our AUM has surged to Rs 16,460 crore, reflecting a remarkable four-year compound annual Growth Rate (CAGR) of 47 per cent. At the beginning of September our AUM has already surpassed Rs 20,000 crore. This underlines the confidence investors have placed in our commitment to deliver benchmark beating returns. 

Significantly, it took us 12 years to accumulate an AUM of the first Rs 10,000 crore and has taken us only 22 months to add another Rs 10,000 crore. 

BT: What have been the returns offered by ICICI Prudential Pension Funds?  

SM: Our investment philosophy has always been focused on giving the best risk adjusted returns over the long term. Currently, the equity scheme has delivered an impressive 12.56 per cent CAGR since inception and 13.90 per cent for the last 10 years. The government securities scheme delivered a CAGR of 8.46% since inception,while for the last 10 years is 9.16 per cent. In case of the corporate bonds scheme, the CAGR since inception was 9.62 per cent while the scheme delivered a CAGR of 9.2 per cent over the last 10 years. (All the returns mentioned are as on September 20). 

BT: With the changing dynamics of the job market, how can the NPS adapt to provide flexible retirement solutions for gig workers and freelancers?   

SM: To cater to gig workers and freelancers, NPS offers flexible contribution options, including annual lump sums or SIPs, adapting to irregular incomes. It's easy to keep an account active with just a minimum annual contribution of Rs 1,000, making NPS an accessible and adaptable retirement solution for them. 

BT: Given the evolving economic landscape, how can NPS remain a reliable and attractive retirement planning tool for future generations of Indians?  

SM: NPS remains highly reliable and attractive for future generations of Indians due to its strong regulatory oversight by the PFRDA, assuring subscribers of its credibility. Moreover, it offers appealing features, including the potential for high returns, along with tax benefits available in both the new and old tax regimes. With the flexibility to allocate up to 75 per cent of contributions to equities, NPS continues to evolve in a way that aligns with the changing financial landscape, ensuring its relevance for years to come. NPS should not be looked at as only a retirement planning tool, instead, it should be looked at as a savings cum retirement planning tool where one starts contributing at an early age and continues to save small amounts over time. At the end of the tenure, there would be a big lump sum along with a healthy retirement kitty for annuity that one can expect to have, all owing to the extremely low cost and professional fund management and a regulator that is forward-looking and completely aligned to the long-term interests of subscribers. eached an impressive 189,082 units.

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