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ANOTHER ALTERNATIVE FOR SAVERS, SALARIED CLASS: PFRDA'S GUARANTEED RETURN SCHEME

by Juhi Tripathi

Date & Time: Mar 03, 2022 5:00 PM

Read Time: 2 minute


HIGHLIGHTS:

  • The Pension Fund Regulatory and Development Authority to introduce a guaranteed return system
  • The scheme's actual returns will be determined by market conditions
  • It is dependent on how the 1-year interest rate develops till retirement

The Pension Fund Regulatory and Development Authority, which oversees the National Pension System, is gearing up to introduce a guaranteed return system that will provide savers and salaried workers a choice in their investments.

What type of returns can you expect from the scheme?

The Pension Fund Regulatory and Development Authority (PFRDA), which oversees and regulates the National Pension System (NPS), is planning to introduce a guaranteed return programme, the Minimum Assured Return Scheme (MARS), that would provide savers and salaried individuals a choice for their investments.

What is the plan of the PFRDA?

EY Actuarial Services LLP has been hired by the regulator as a consultant to help build the proposed MARS under the NPS. This will be the first time the pension regulator has offered investors a guaranteed return.

The proposed design, however, merely establishes the floor, and the consultant is anticipated to complete the MARS framework in the coming months. The PFRDA hopes to have the programme up and running by the end of the year.

Returns to be offered by scheme

The scheme's actual returns will be determined by market conditions. Any shortage will be covered by the sponsor, and any excess will be credited to subscribers' accounts. There are likely to be two options available:

  • Fixed Guarantee Option – This option guarantees a certain rate of return throughout the accumulation phase.
  • Floating Guarantee Option – With this option, the guaranteed rate of return is not fixed for the course of the savings period.

It is dependent on how the 1-year interest rate develops till retirement. Each annual contribution is assigned a current 1-year interest rate. It's valid till retirement. This alternative is similar to the Denmark ATP system, in which 80 percent of contributions are guaranteed based on market rates when contributions are received.

Lock-in plan

Lock-in may apply to each contribution under the existing plan. It will be imposed based on the length of time since the contribution was made. For added flexibility, it may contemplate a variety of lock-in periods. Withdrawals are likely to be linked to the lock-in period. After the lock-in period, subscribers will have the option to stay invested or withdraw. After lock-in, however, there will be no guarantee applied to the investment.

What is the current asset size?

As of January 31, 2022, NPS had Rs. 6,85,745 crore in assets under management and 1.53 crore subscribers. By the end of March, its assets are likely to reach Rs 7 lakh crore. The NPS is a voluntary, defined contribution retirement savings plan that enables subscribers to make the best decisions for their future by making systematic deposits throughout their working lives.

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