How are the funds of government employees invested in NPS?
The National Pension System (NPS) in India is a pension scheme that helps the individuals to save money for their retirement. It is mandatory for some government employees to register in this scheme, while it is voluntary for other subscribers.
Unlike the fixed amount in Old Pension Scheme, the NPS will provide a market-linked return to the government employees. Under NPS, the employees contribute a certain amount from their monthly salary, into their retirement account.
The amount that is deposited in the working years, is invested in different schemes. At retirement time, the accumulated amount can be withdrawn in lump sum mode, or it can be used to purchase an Annuity plan.
There are multiple NPS schemes for government employees, where the funds can be invested till the retirement date. The investment schemes purchase different financial instruments like Stocks, Bonds, Government securities etc. On the other hand, there are separate investment schemes for the normal subscribers in NPS.
Pension Fund Manager (PFM)
A Pension Fund Manager is the entity that is responsible for investing the money of the subscribers, into multiple financial instruments. The PFMs manage the different Pension Fund schemes, and the units of these schemes are allocated to the investor. So, the whole process works in a very similar way as the Mutual Funds.
Example: Suppose that an NPS subscriber has selected PFM ZZZ as the fund manager. When the subscriber contributes money to his/her NPS account, then this money will go to PFM ZZZ. The PFM will then invest the money, and allocate units of the ZZZ Pension Scheme to the subscriber.
The Pension Fund Managers run different schemes for different asset classes. For example, Scheme E primarily invests in stocks, Scheme B primarily invests in Bonds etc. The normal subscribers can select the percentage amount that they would like to invest in each scheme. (Refer: How to set and change scheme preference in NPS?)
In addition, some PFMs also run special NPS schemes for government employees only. The normal subscribers do not get the option to invest in such schemes.
Choosing a PFM and asset allocation
Under the New Pension Scheme for government employees, a part of the salary of the employee is contributed towards the NPS. The employer (Centre government or state government) then matches this contribution, and deposits an equivalent amount to the NPS account of the employee.
For government employees, the total contribution made in the NPS account will be invested in the investment schemes that are managed by different Pension Fund Managers (PFMs). The percentage allocation and the schemes of PFMs will be selected by the employer.
For example, the education department of a state government might be investing primarily in the pension scheme of PFM YYY. Whereas the housing department of another state might be allocating primarily in the scheme of PFM ZZZ.
For the government employees, activities like: changing the percentage allocation, contribution to the account, withdrawal from NPS etc., have to be done through the employer. So, the best place for the government employees to check and manage their investments under NPS, is through their corresponding employer.
At retirement time, the accumulated amount can be withdrawn in lump sum mode, or it can be used to purchase an Annuity plan from an Annuity Service Provider (ASP). Based on the plan, the ASP will then pay a monthly pension to the subscriber.
Different government employee schemes in NPS
The major benefit of having separate NPS schemes for government employees is that the PFMs usually charge a very low Investment Management Fee (IMF) for these NPS schemes. There are also tax exemptions at contribution and withdrawal time in NPS. (Refer: What is the tax benefit on NPS scheme?)
In addition, the risk associated with the scheme is also low, because a major portion of funds is invested in Fixed Income instruments like Bonds and Government Securities. All these factors make the NPS scheme very attractive for long-term investments.
Below, we give the details about the different schemes that are especially available for government employees (and some corporate employees). It is not possible for the normal subscribers to directly purchase the units of the below-mentioned schemes. These investment funds are run separately from the E, C, G and A schemes of the PFM.
CG scheme in NPS
The NPS CG scheme is primarily designed to be used for the investments of central government employees only. But not every PFM will offer the CG schemes in NPS. The government chooses the default percentage allocation of funds in the multiple CG schemes of different PFMs.
This means that when a central government employee makes a contribution to the NPS account, then the total amount (employee + employer contribution) will be invested in the selected NPS CG schemes. Since the year 2019, the NPS CG employees can also submit a request to change the percentage allocation that is pre-defined by the government.
Example: Suppose that the government has selected to invest 60% in CG scheme AAA (managed by PFM AAA) and 40 % in CG scheme BBB (managed by PFM BBB). As per their investment strategy, PFM AAA and PFM BBB will invest the received amount in different financial assets.
SG scheme in NPS
Just like the separate scheme for central government employees, the NPS SG scheme is earmarked for the state government employees only. For the states who are under the New Pension Scheme, the total amount (employee and employer contribution) is invested in the SG schemes that are offered by different PFMs.
The funds received by the PFM will then be invested in the different financial assets like Bonds, Government securities, stocks etc. The PFM will issue units of the NPS SG scheme to the state government employees. As investment returns are generated, the value of these units is expected to grow over time.
Corporate CG scheme in NPS
As the name probably suggests, the NPS Corporate CG scheme is specially designed for the companies/entities, who would like to provide NPS benefits to their employees. This scheme is not available for government employees.
The main idea behind this scheme is that it allows private companies to give retirement benefits, that are similar to the pension benefits of the government employees in NPS. The Corporate-CG scheme in NPS is a separate scheme that is managed by some PFMs. It works in a very similar way as the CG and SG scheme in NPS.
In addition, the corporate scheme also has a low Investment Management Fee (IMF), like the NPS schemes for government employees. Although the management fee is low for Corporate CG, but it is still higher than the fees for CG and SG NPS funds.
For the entities that invest in the NPS Corporate CG scheme, the employees would need to contact their employers to perform all the transactions like: making contributions, withdrawal etc.
Performance of NPS schemes for government employees
The CG, SG and Corporate CG scheme in NPS are primarily available in the Tier 1 NPS accounts. The subscribers can also choose to open a Tier 2 account, to make additional investments in the traditional A, C, E, G and NPS-TTS schemes that are offered by PFMs. (Refer: What are Tier 1 and Tier 2 NPS accounts)
Because these are investment schemes, their value is expected to increase in the future. The subscribers can check the past returns generated by all the NPS schemes, by using this link from the NPS trust website. In addition, the performance of the different NPS investment schemes is also published in business newspapers, at regular intervals.
It is recommended to focus on the long-term performance of the funds, because that will provide a better idea about the returns that have been generated. Doing analysis on the short-term performance of the schemes can generate a biased opinion, because the prices could be affected due to market fluctuations.
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