Atal Pension Yojana is not looking a good bet!

Atal Pension Yojana (APY) has proposed in Budget 2015-16, which is primarily opened to all workers who have been working in unorganized sectors to voluntarily save for their retirement. Though the Government had started the Swavalamban Scheme in 2010-11 which is inadequate mainly due to lack of guaranteed pension benefits at the age of 60 therefore, a new initiative called Atal Pension Yojana has taken to revamp the Swavalamban Yojana NPS Lite and tried to make it more attractive, simple with guaranteed returns benefits. The scheme will come into force on June1, 2015 and will address old age income security needs. The existing Swavalamban subscriber will be automatically migrated to APY with an option to opt out.

In simple words, it is focused for all citizens of the country who work in the unorganized sector and intend to have a guaranteed fixed amount of pension after retirement.

About the Scheme

The APY is administered by the Pension Fund Regulatory and Development Authority (PFRDA) through NPS. All workers between the age 18 years and 40 years can subscribe the scheme and while exiting at the age of 60, they will get a defined fixed monthly pension. It implies that every subscriber will have the minimum period of contribution of 20 years or more. To make the pension scheme more attractive, the government would also co-contribute of 50% of the subscriber contribution or Rs 1000 per annum, whichever is less, for a period of 5 years, i.e. from 2015-16 to 2019-20 who are not income tax payers and would open their account from 01-06-2015 to 31-12-2015. However the scheme will remain open after this date but Govt. Co-contribution cannot be availed.

Your Contribution and Fixed Pension

Under the APY, you would have to opt to receive a fixed monthly minimum pension of Rs. 1,000 , Rs. 2,000, Rs. 3,000 , Rs. 4,000 and up to maximum of Rs. 5000 at the age of 60 years, depending on your contributions, which itself would vary according to the age of joining the scheme. There are five options available under this scheme in which you can avail any of the option as per your choice. Each option has a defined fix amount of contribution amount of money for getting the monthly pension by you and your spouse at different age.

The following table mentions that how much you need to contribute to get your pension under this scheme at different ages. The indicative corpus at the age of 60 years which needs to be payable to the nominee of subscriber is also mentioned in the table.

Indicative Monthly Contribution and Monthly Pension Chart

According to table, at the age of entry 30 years old, if you want to get a monthly pension of Rs 4,000 per month at age of 60 years old, you will need to contribute Rs 462 per month for 30 years and the government will put Rs 1,000 per annum for a period of 5 years. Similarly at age 40, you have to annual contribute worth Rs 6,924 and you will get monthly pension Rs 5,000, on your demise, your spouse will get the pension and when both die, the nominee gets the corpus back.

Abysmal Rate of Return

At age 30, while getting monthly pension of Rs 5,000 on government funding of Rs 1,000 per annum for 5 years, the internal rate of return will reach at the rate of 8.44% per annum whereas without government additions to the savings for the same age and pension set, you get the internal rate of return drops at 7.35% that yields Rs 8.50 lakh. Undoubtedly, in the both cases, returns are not different from the prevalent rates on Public Provident Fund (PPF) and Employees’ Provident Fund (EPF), hence either you are not getting the government handout or is getting a sub-optimal return. Depending on the evolution of inflation rates over time, these nominal rates of return could end up resulting in very low real return or even the risk of erosion in capital due to inflation. When we look at a pure return on the equity funds it is 13.25% while considering return on government bonds schemes of NPS is at 9.09%, on the corporate bond scheme is at 10.65%, we can take a conservative an average return mix of three fund options, it would give at 11% for the same saver which one can make a corpus of Rs 15.30 lakh, almost double of what you are currently getting under APY scheme.

Inadequate of the defined benefit

Like NPS, the Atal Pension Yojana (APY) is another a complicated scheme which is not looking a good deal as its pathetic monthly pension numbers could not bite of inflation in the future. In order to judge the adequacy of the defined pension benefit proposed under APY, we take two sets of indicative monthly contributions so as to get nominal defined benefit pay-outs of Rs. 1,000 per month and Rs. 5,000 per month at the time of retirement at 60 years.

Since APY is designed as a pension scheme for a household, we assume the average monthly expenditure for the 30 year old income subscriber and his spouse as low as Rs 1,256. At age of 60, the defined benefit at retirement will yield a real monthly pension of Rs 231 and Rs 1157 for the household at a discount rate of 5% equivalent to a nominal monthly pension of Rs 1,000 and Rs 5,000 and will be sufficient cover only 18.4% and 92.1% of their monthly expenditure respectively.

We know that current inflation continues to hover around historical inflation of 8%, the defined benefit would cover a much lesser percentage of an individual’s expenditure per annum. For instance, for a 30-year old who contributes Rs. 116 a month, the monthly defined benefit would be sufficient to cover a mere 7.9% of their monthly expenditure upon retirement at 8% discount rate. Hence the guarantee in the Atal Pension Yojna is just putting peanuts into subscriber’s pocket. If you think this scheme is not fit according to your post-retirement living standard, you may suggest this scheme to your maid, driver or any person  who you think should get a minimum pension by the time they turn 60.

This article got published in Hindi at Dainik Bhaskar on 14-Jul-2015. See the link

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