NPS Multiple Scheme Framework (MSF): Is PFRDA killing the simplicity of NPS?

NPS has always been simple and cheap, but it has struggled to attract investors like mutual funds or insurance products have. Now, PFRDA has launched the Multiple Scheme Framework (MSF), offering more choices and flexibility. Sounds great, right?

But is this really what NPS needs, or is it just making a good thing messy?

Let’s find out.

What is Multiple Scheme Framework (MSF) under NPS?

Until now, you could invest only in one scheme. Either Active choice or Auto choice. Active/Auto schemes are also called common schemes.

Going forward, pension fund managers (ICICI, HDFC, SBI, UTI, Kotak etc.) can launch their own schemes. Hence, you will have options beyond Active and Auto choice schemes.

What is different about these MSF schemes?

Under MSF schemes, the equity exposure can go up to 100%. Under the Active/Auto schemes, the exposure is capped at 75%.

Under the MSF framework, you can invest in more than 1 scheme. You will no longer be limited to just 1 scheme.

Moreover, pension fund managers (PFMs) can launch schemes for a specific age group (e.g., young earners, middle-aged earners etc.) or segments or occupations such as gig-workers, self-employed, entrepreneurs, consultants. So, it is a blank canvas, and PFMs can launch schemes as they wish (subject to PFRDA approval). However, for each scheme, they must launch both high risk and moderate risk variants. PFMs can also launch a low-risk variant if they wish.

Here are examples from UTI and HDFC pension fund managers.

NPS Multiple Scheme Framework (MSF): Key Features and Rules

1. MSF is only for non-Government subscribers (All-citizens model and Corporate NPS model).
2. Government NPS subscribers can’t invest under MSF.
3. These MSF are required to have a minimum vesting period of only 15 years. This means you do not have to wait until 60 or superannuation for a regular exit (to withdraw your money from this scheme).
4. Contrast this with Auto or Active choice schemes where a regular exit is not possible before the age of 60 or superannuation. Yes, you can exit (premature) from Auto choice or Active choice schemes before the age of 60 too. However, in that case, the mandatory annuity portion goes up from 40% to 80%.
5. You cannot switch from one MSF to another before completing the vesting period of 15 years. After completion of 15 years, you can switch among MSF schemes.
6. You do have an option to switch from an MSF scheme to a common scheme (Active/Auto) before completion of 15 years. Can do this after completion of 15 years too.
7. As I understand, you cannot move money from a common scheme (Active/Auto) to an MSF scheme.
8. The expense ratio for an MSF scheme can be up to 0.3%. For common scheme (Active/Auto), the expense ratio is capped at 0.1%.

NPS: Regular and Premature exit

In case of regular exit from NPS, you can withdraw up to 60% lumpsum and at least 40% must go towards annuity purchase.

In case of premature exit, at least 80% must be utilized for annuity purchase. Remaining 20% can be withdrawn lumpsum.

The above rules apply to both common schemes (active/auto) and MSF schemes.

What is a regular exit and premature exit for NPS schemes?

In case of Active/auto choice scheme, regular exit happens at (or beyond) the age of 60 or at the time of superannuation. Any earlier exit shall be deemed premature exit.

In case of MSF schemes, regular exit can happen after completion of vesting period of 15 years. You do not have to wait until the age of 60.

PFRDA has proposed to hike lumpsum withdrawal limit from 60% to 80% and reduce mandatory annuity purchase from 40% to 20%. Most likely, this will go through too.

Remember the tax rules. As per Section 10(12A) of the Income Tax Act, the lumpsum withdrawal is tax-exempt only up to 60% of the accumulated corpus. Hence, while PFRDA may increase lumpsum withdrawal limit to 80%, the excess 20% will be taxed at your slab rate (unless the Government enhances the tax-exempt limit from 60% to 80%).

Feature	Existing NPS	NPS with MSF
Number of Schemes Allowed	Limited to one scheme per subscriber (Active or Auto Choice)	Can hold multiple schemes at one time. Can also hold MSF schemes and common at the same time.
Equity Exposure Cap	Maximum 75% equity exposure	Up to 100% equity exposure allowed in high-risk schemes
Vesting Period	Age of 60 years or superannuation	Minimum 15 years vesting period
Switching Funds	Allowed between Active and Auto schemes	Switching allowed within MSF schemes only post 15-year vesting; Switch from MSF to common scheme (Active/Auto) permitted before completion of vesting period
Expense Ratio	Capped at 0.1% p.a.	Capped at 0.3% p.a. for MSF schemes. Capped at 0.1% p.a. for common schemes
Investor Segmentation	Generalized schemes for all subscribers	PFMs can launch schemes targeted at specific age groups, professions, and risk profiles
Mandatory Annuity Purchase	Same for both. Currently at 40% for regular exit. 80% for premature exit. PFRDA has proposed to reduce from 40% to 20% for regular exit.
Tax Implications	Tax rules are the same. Withdrawals up to 60% tax-exempt under Section 10(12A)
Flexibility and Complexity	Simple, easy to understand	More choice but increased complexity

How MSF works: An example

Until now

You could invest in just one scheme.

You could invest either in Active choice scheme OR the Auto choice scheme.

Under active choice, you could decide the asset allocation between Equity (E), Government Bonds (G), and Corporate Bonds (C), with allocation to the equity fund (E) capped at 75%. And you could choose one (E) from various equity funds offered by the pension fund managers (PFM). Each PFM could offer only one E, C, and G funds.

Under Auto choice, you could choose one of the 4 lifecycle funds where the asset allocation among the 3 funds (E, C, G) automatically changes every year depending on your age.

That’s it.

Going forward under MSF framework

You will have a wider choice of schemes since the PFMs would launch new schemes.

And you can invest in more than 1 scheme.

Hence, technically, you can invest in the following manner too.

1. 25% to Active choice scheme by SBI PFM
2. 30% to Auto choice scheme by UTI PFM
3. 35% to MSF-A launched by HDFC PFM.
4. 15% to MSF-B launched by ICICI PFM

MSF-A could be a high-risk scheme that invests 100% to a midcap fund (which will also be launched by the PFM). MSF-B could be moderate risk scheme that allocates to a balanced fund or to a 50:50 mix of equity and government debt funds.

These MSF schemes have a minimum vested period of 15 years (can be higher as decided by the pension fund manager).

Let’s say MSF-A has vesting period of 15 years. If you start investing here at the age of 35, you will be eligible for a regular exit after 15 years at the age of 50. Now, this age of 50 may coincide with your other life goals. Say children’s higher education. So, you can exit MSF-A at the age of 50. You can withdraw 80% as lumpsum (if the PFRDA proposal goes through) and will have to utilize only 20% for annuity purchase.

60% (out of 80% lumpsum withdrawal) will be exempt from tax as per as per Section 10(12A). of the Income Tax Act. The remaining lumpsum withdrawal will be taxed at your slab rate.

Essentially, with this move, NPS can help you plan not just for retirement but for other goals too. This is not necessarily a good thing, but NPS does have this flexibility under MSF. Yes, the mandatory annuity will complicate matters, but you can still take out most of the money (and tax-free too) before the age of 60.

For freelancers/consultants/self-employed/gig workers, this could be quite useful. Such investors don’t have clear visibility about their career trajectory. Hence, they may prefer NPS scheme options that allow earlier exits too. However, PFRDA did not have to launch MSF for this. It could have simply allowed subscribers under All Citizens model a regular exit after the age of 45 or 50.

Point to ponder over: If NPS starts offering liquidity/flexibility of mutual funds, does it deserve the tax benefits that are not extended to mutual fund investments?

PFRDA’s NPS quandary: Is MSF good for NPS?

I understand PFRDA’s quandary. NPS has found traction in the private sector to its liking.

NPS must have also lost a number of subscribers to UPS (Unified pension scheme) too.

Hence, PFRDA wants to add more spice to the product. Make it more flexible. Make it look and sound more exotic and hope that the investors will be attracted to NPS. Can’t fault PFRDA for this. One of its responsibilities must be to create conducive environment to grow the industry.

What are some of the problems of NPS?

1. Long lock-in periods. You can’t withdraw money before the age of 60 or superannuation. This can put away investors, especially in private jobs or outside formal employment.
2. Mandatory purchase of annuity of 40%. While I am ok with this requirement, many investors may have had issues with this, especially those with big portfolios. NPS has proposed to reduce this to 20%.
3. NPS must compete for investor funds with other alternatives. And it has formidable opponents in mutual funds and the insurance industry.
4. The pension fund managers (PFMs) may lack the financial muscle of their competitors. How many advertisements have you seen from PFRDA or pension fund managers? Or have you seen any comparable industry initiatives such as the “Mutual Funds sahi hai” from MF industry?
5. The PFMs (unless NPS attracts volumes) do not earn as much as their counterparts in other industries. The expense ratios for NPS funds are low (0.1% p.a.). A low expense ratio is good for investors. With mutual funds, expense ratios can go up to 2.25%. ULIP funds (from insurance companies) can charge fund management fees of up to 1.35%.
6. The NPS intermediaries earn far less compared to what mutual funds and insurance products offer them.
7. The mutual funds and the insurance companies offer you a lot of choice. No such thing with NPS. Each pension fund manager can offer only 1 equity, government bonds, and corporate bonds fund. Contrast this with almost infinite choice that the mutual funds and insurance products offer. More choice is not always good. It can lead to more confusion and decision paralysis. However, PFRDA thinks more choice (and a complex product structure) is needed to attract investor interest in NPS.

Through MSF, PFRDA aims to kill multiple birds with a single arrow. Apart from that, it has proposed changes to exit and withdrawal rules that can alleviate concerns of the investors.

1. Possibility of regular exit after 15 years.
2. Lower mandatory annuity purchase.
3. Higher expense ratio of 0.3% for pension fund managers (PFMs). An additional 0.1% for a period of 3 years if 80% of the subscribers to such scheme are new to NPS. This can also lead to better incentives for intermediaries.
4. More choice of schemes/funds for the investors.

NPS Value proposition

1. It is simple.
2. It is low-cost.
3. Provides tax benefits on investment.
4. Provides tax-free rebalancing. This benefit is exclusive to NPS. And this is a super benefit. Many smart investors already realize this.
5. Allows up to 60% of the withdrawn lumpsum tax-free.

Despite all these merits, NPS has not found traction to PFRDA’s liking.

(3), (4), and (5) are not really under PFRDA’s control. Yes, the regulator can lobby with the Government, but tax policies are the Government’s decision.

(1) and (2) are completely under PFRDA control. And through MSF, it is compromising on some of the biggest traits of NPS.

You might argue 0.3% that MSF will charge is still much lower compared to mutual funds and insurance funds. I agree. 0.3% is not very high. Most actively managed direct plans of equity MFs charge much more.

But the Multiple Scheme Framework (MSF) simply kills the simplicity of NPS. I am not even sure if I have understood the MSF framework properly. Now, picking NPS scheme/fund will become as complex as selecting a mutual fund scheme. And NPS was supposed to be simple.

My problem with MSF is that NPS is already a very decent product. It is unfortunate that it has not found a lot of traction. While I understand PFRDA’s compulsions, the introduction of MSF framework is a classic example of how to ruin a perfectly good investment product.

The good part is that MSF is voluntary. If you have been investing in NPS, you can continue investing the same way. Nothing changes for you. No point wasting your time and energy in exploring MSF.

What should you do about NPS MSF?

1. Ignore MSF completely. It sounds exotic but you don’t need it. Adds unnecessary complexity to your NPS investments.
2. NPS is a better and simpler product without MSF. I understand lock-in until the age of 60 is a problem for many of us. But there are simpler solutions available for this, such as relaxing exit age for All-Citizens model subscribers.
3. You don’t have to invest in NPS for everything. Even for retirement, NPS does not have to be your only investment.
4. If you think your existing NPS investments are too bland, you can explore investments outside NPS.

Source/Additional Read

1. NPS MSF Circular
2. Exposure Draft: Amendments to Exits and Withdrawals under NPS

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This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.