In debate over NPS and EPFO returns, one retirement fund edges ahead

India's lagging pension savings may need a leg-up as the economy grows

If you work for 30 years, a two per cent difference in pension returns can reduce your final retirement nest egg by 40 per cent.

The Rs 9-trillion National Pension System (NPS) seems to be delivering incrementally higher returns than the twice-as-large Employees’ Provident Fund Organisation (EPFO), shows a Business Standard analysis of data over the last seven years for the two retirement fund bodies.

An investor who put in Rs 100 in retirement savings seven years ago would have seen her NPS nest egg grow to Rs 182 by 2023, according to the analysis based on the Pension Fund Regulatory and Development Authority’s recently released Handbook of National Pension System Statistics 2023. The corresponding EPFO return would be worth Rs 176 as seen in chart 1 below

The EPFO declares the return it offers subscribers annually. It may not entirely be dependent on returns from the fund's underlying investments. NPS returns are based on how the fund’s underlying investments are doing. NPS was set up as part of a larger move to have pensions linked to returns on contributions rather than as a fixed obligation. The move was hoped to help better manage pension liabilities. Some states have opted to return to the old scheme where the responsibility goes back to the government.

The structure of the NPS has meant greater fluctuations in yearly returns. Returns in good years have helped edge it ahead of the EPFO since 2015-16 despite tepid gains in other years. NPS returns have varied 4-16 per cent in the last seven years. The EPFO returns have remained in a narrower band of 8-9 per cent.

The difference in returns may also be influenced by portfolio allocations. The EPFO can at most invest 15 per cent of its corpus in the stock market. Only ten per cent of this ceiling has reportedly been used. The NPS’s stock market allocation was 16.6 per cent as of March 2023. The NPS equity limit is 75 per cent, with a recent circular allowing for up to 100 per cent in certain schemes. The stock market usually gives higher returns than debt products in the long term.

EPFO had a corporate bond exposure of 20.5 per cent as of 2021-22, mostly from the public sector. Corporate bonds give higher returns than government securities. The segment accounted for 27.4 per cent of total NPS assets.


 

India’s pension fund returns are important as retirement assets are relatively low compared to the size of the economy. Brazil’s pension plan assets are the equivalent of 25.3 per cent of its gross domestic product (GDP), according to a recent study by the Paris-based Organisation for Economic Co-operation and Development (OECD). It is 31.4 per cent in Japan, 31.8 per cent in Korea, 82.6 per cent in South Africa; and over 100 per cent in both the US and the UK.

India’s figure is 9.2 per cent.