MORE REFORM NEEDED IN RETIREMENT SAVINGS

The pension regulator's move to raise the cap on equity exposure of voluntary subscribers to 75% from 50% through the life cycle fund is welcome. It provides flexibility to a person whose age is 35 years or less to allocate more of her savings to risky equity and reduce that exposure as she moves closer to retirement and her risk-taking ability comes down. Equities in fast growing India offer superior returns along with higher risk. Civil servants are hamstrung as the NPS limits their contribution to a maximum 15% exposure to the stock market, as the investment norms are absurdly linked to the Employees Provident Fund's rules. That must change. The government should take steps forthwith to allow individual civil servants to be treated on par with voluntary savers with regard to choice of asset class and fund manager. The government should also swiftly resolve the legal and operational hurdles to let workers switch to the NPS rather than save with the Employees Provident Fund, if they choose to. This will increase the enrolment to the NPS and substantially increase the pool of funds to be managed by the NPS that has the institutional framework to generate superior returns. More volumes will also bring stability to the system. Locking all savers into exposure to equity regardless of their age profile is a major shortcoming of the EPF and constitutes one more reason for migration to the NPS. Workers will choose to migrate to the NPS only when there is tax parity between the EPFO and the NPS. The EPFO is tax exempt at the three stages of contribution, accumulation and withdrawal whereas NPS is taxed at the time of withdrawal. The government should bring parity to the tax treatment of both retirement saving schemes.