NPS overhaul: PFRDA proposes 3 new pension models focused on SWP, inflation, assured payouts

The Pension Fund Regulatory and Development Authority (PFRDA) has released a consultation paper proposing significant changes to the National Pension System (NPS). The new framework seeks to address long-standing concerns around income adequacy and predictability of retirement income, which remain unresolved under the existing NPS structure that mainly emphasizes corpus accumulation.

PFRDA has invited feedback from academics, pension funds, and other stakeholders to deliberate on the proposals. “The aim is to generate interest among stakeholders for the development of the pension market in India by covering both the accumulation and decumulation phases,” the regulator stated.

Currently, NPS operates as a transparent, defined contribution scheme that prioritises fiscal prudence and mark-to-market valuation. However, from a subscriber’s point of view, challenges such as market volatility, irregular contributions, and unpredictable returns often leave uncertainty over the final pension corpus and post-retirement income.

To overcome these gaps, PFRDA has proposed three distinct pension scheme models under NPS, each offering different levels of flexibility and assurance.

Scheme 1: Desired pension through step-up SWP, annuity

The first model blends a Systematic Withdrawal Plan (SWP) with annuity to provide flexibility but without guarantees on pension wealth or benefits. Subscribers can define a “Desired Pension” with an Indicative Contribution (IC), which remains fixed unless revised.

The scheme requires a minimum 20-year accumulation phase, beginning from age 18, with no upper limit. Investment would follow the Balanced Life Cycle model, where 50% of contributions are allocated to equities until the age of 45, tapering thereafter.

During retirement, subscribers would initially receive payouts through an SWP at 4.5% of corpus annually (divided monthly), with increments of 0.25% each year for a decade. At age 70, the remaining corpus is used to purchase an annuity payable for 20 years certain and thereafter for life. In case of the subscriber’s death before age 90, benefits continue to the spouse or children until the notional 90th birthday.

Scheme 2: Target pension with inflation indexation

The second model provides an assured pension benefit indexed to inflation, offering greater predictability. Here, subscribers define a “Target Pension” to be received in the first year after retirement. The pension amount is then adjusted annually based on the Consumer Price Index for Industrial Workers (CPI-IW), ensuring protection against inflation, with a 0% floor during deflationary phases.

Contributions are structured as a Cost Neutral Contribution (CNC), with a mandatory 10% buffer to safeguard against underfunding risks. This scheme also requires a 20-year minimum accumulation period.

At retirement, the corpus is split into two pools:

Pool Scheme 1 ensures fixed pension through investments in government securities and high-rated bonds.

Pool Scheme 2 funds inflation adjustments with up to 25% equity allocation for growth.

The decumulation phase lasts 25 years, during which pensions continue to the spouse and subsequently family members as per NPS exit regulations. To stabilize returns, the model also allows liability-driven investment (LDI) strategies and held-to-maturity (HTM) valuations.

Scheme 3: Pension credits for assured payouts

The third and most innovative model introduces “Pension Credits”—a goal-based mechanism offering fixed payouts. Each credit guarantees ₹100 per month post-maturity for a defined period (1, 3, or 5 years). Subscribers specify their retirement year, pension target, and investment scheme choice—aggressive (75% equity), moderate (50%), conservative (25%), or debt-focused.

The pricing of credits depends on the present value of future payouts, adjusted for risk and performance. Accumulation is limited to 15 years, with decumulation spanning 1–5 years. Unlike traditional units, credits are managed via pooled schemes and may adopt HTM or mark-to-market accounting.

To enhance liquidity and accessibility, PFRDA has also proposed a secondary market for trading pension credits. Each credit would carry a standardised nomenclature, for example:

PF1.40.A.5 for an aggressive scheme maturing in 2040 with a five-year payout, or

PF3.40.D.1 for a debt-focused credit maturing in 2040 with a one-year payout.

What does this mean

The proposed schemes reflect PFRDA’s attempt to balance fiscal discipline with subscriber-centric assurances. While Scheme 1 focuses on flexibility, Scheme 2 provides inflation-adjusted certainty, and Scheme 3 introduces market-linked pension credits that could potentially be traded.

By broadening the pension options, the regulator hopes to build a more robust retirement income system in India. Feedback from stakeholders will shape the final framework, which, once implemented, could mark a transformative shift in India’s pension landscape.