It was reported in Mint (NPS Pension Payouts to become Flexible, 2 March 2020) that the Pension Fund Regulatory and Development Authority (PFRDA) is working on alternatives to the National Pension Scheme (NPS). Amongst the proposals being considered are to offer a Systematic Withdrawal Plan (SWP) and a Variable Annuity Plan (VAP). What do these mean and what does it mean to a retired old person?

Systematic Withdrawal Plan

Much like the SWP of mutual funds, the pensioner can withdraw a fixed sum from the corpus of the pension fund (not the earnings of the fund). The amount to be withdrawn can be set by the pensioner. But the important thing to note is that the SWP is paid from the corpus of the fund. Typically therefore the fund value reduces every time a SWP payment is made. Under SWP if a person lives a long life he or she may not have money towards the end of his life. Because every payment, every month, reduces the corpus and it could become zero in no time. Not an ideal situation for a person who is approaching the sunset of his or her life.

Remember ULIPs too had similar clauses – And What Happened!

Many ULIPs also made the same claim – that policy holders can stop paying premiums after say 5 years, and the premium amount would be deducted from the fund value of the ULIP. We all know the result. Thousands of policy holders were left with no money in their ULIP funds and at the time of withdrawal from the ULIP plan they were in fact asked to pay to withdraw. What about the other proposed scheme – Variable Annuity Plan?

Variable Annuity Plan (VAP)

This is another hair-brained scheme of PFRDA. Under this scheme, the pensioner’s monthly pension will be subject to the market performance of the pension fund he or she is invested in. So if the markets fall in a particular month, or for many months, or if there is high degree of volatility (as it has been for a few years now), the pensioner may receive no pension or very little pension. Again not a good option for old persons. At an age where one looks for stability and risk free income, the PFRDA is offering schemes which will result in sleepless nights to the elderly.

Stability of income is more important than wild dreams of earning more

As life insurance agents we should know that the new schemes of PFRDA are not for older persons. In old age one needs certainty of cash flows (and not dependent on financial markets and their volatility), and confidence that the pension will be available for self and spouse for life time (without the corpus getting eaten away through SWP). The two new proposals do not meet the requirement of pension schemes. They do not meet the real needs of pensioners and therefore do not satisfy the benchmarks that all pension schemes should at the very minimum possess.

Look Out for Media Hype and Warn your Customers

Soon you will find that the media will be very loud and aggressive in trying to influence the readers and viewers on how the new schemes are better than a guaranteed income scheme for pensions. The media will project that the two schemes offer pensioners a higher pension. They may get a higher pension for a few months, but when you look at a 20 year or 30 year post retirement life, the pension received during this period will be much lower as compared to a traditional pension scheme. Equally important the certainty of pension receipts will be very low. How much pension per month one will get is uncertain in the case of VAP scheme.

It is very likely that your customers will get influenced by misleading campaigns. As a life insurance agent it is your duty to point out the real issues created by the schemes. Which is why we say ….

Sell Risks Not Returns

Attention all Managers/SBAs/Development Officers/CLIAs train your agents this week on the subject of this article. Keep them ahead of the market and equip them to meet customer objections.

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