NPS Annuity Rates Too Low? PFRDA Chairman Suggests Variable Annuities To Counter Inflation

The Pension Fund Regulatory and Development Authority (PFRDA) Chairman, Deepak Mohanty, recently highlighted concerns regarding the unattractive annuity rates in the National Pension System (NPS). He urged actuaries to design innovative products, particularly variable annuities, that provide a hedge against inflation risk to make the system more appealing to retirees.

While the NPS offers several attractive features for long-term retirement planning, one major drawback deters many potential subscribers-the mandatory purchase of annuity plans. Upon exiting the NPS, subscribers must allocate at least 40 per cent of their accumulated corpus toward annuity plans. Most subscribers find this mandatory annuity requirement unappealing due to the low returns provided by annuity schemes offered by pension providers.

"A recurring concern regarding the NPS is the unattractive annuity rates provided at the time of retirement. On exit, an NPS subscriber has necessity to annuitise at least 40 percent of her corpus," Dr Mohanty said during the Global Conference of Actuaries in Mumbai on March 18, 2025.

Understanding The NPS Structure

Unlike other retirement options such as the Employees' Provident Fund (EPF) or the Public Provident Fund (PPF), NPS allows for equity exposure, which can generate higher returns over the long term. The annual contributions made by a subscriber are invested in a diversified portfolio consisting of equity, corporate bonds, and government securities.
Additionally, NPS provides flexibility to continue contributions for up to 10 years beyond the retirement age.

However, upon exiting, retirees must adhere to the annuity mandate, where a minimum of 40 per cent of their corpus is allocated to an annuity plan, ensuring regular income in the form of monthly, quarterly, half-yearly, or yearly payments. These payments can last for a fixed period or even for a lifetime, depending on the payout option chosen by the subscriber.

The Issue With Annuity Returns

One of the key challenges faced by NPS subscribers is the low returns from annuity products. Currently, annuity plans offered by insurers provide fixed and guaranteed interest rates. However, due to prudential requirements and conservative investment strategies, these rates are often significantly lower than prevailing interest rates in the economy. This results in a lower-than-expected retirement income for subscribers, making the mandatory annuity requirement a less attractive option.

The Need For Innovation In Annuity Products

To address this issue, Dr. Mohanty emphasized that, "With increasing number of subscribers superannuating from NPS in the coming years, there is lot of opportunity in the NPS annuity segment. It is reasonable to expect the actuaries to design innovative products, particularly variable annuity that provides a hedge against inflation risk."
Dr. Mohanty also discussed the upcoming implementation of the Unified Pension Scheme (UPS), set to launch on April 1, 2025. He highlighted the critical role actuaries will play in ensuring the scheme's sustainability through periodic assessments.

"The NPS for the central government subscribers is morphing into the Unified Pension Scheme (UPS) which is a fully funded defined-contribution (DC) and defined benefit (DB) scheme. In this scheme, the actuaries will have a major role to play in the periodic assessment of the sustainability of the scheme."