There was a time, not so long ago, when the Income Tax Act specified that of the sum you could invest under Section 80C, only ₹10,000 could be put in tax-saving mutual funds. The rest had to go elsewhere — PPF, insurance, NSC, whatever. The government, in its wisdom, had decided that equity mutual funds were risky and citizens needed protection from their own enthusiasm. Never mind that ELSS funds had consistently outperformed the other options over any reasonable time horizon. The rule was the rule.
That cap was eventually removed, and today you can allocate your entire 80C limit to ELSS if you wish. But the mindset that created that rule – the belief that regulators know best and must specify precisely what citizens should do with their money – was widespread. The history of Indian financial regulation is littered with prescriptive rules that assumed everyone’s life looked the same.
This brings us to the recent changes in the National Pension System. The pension regulator has reduced mandatory annuity purchases, removed lock-in periods, allowed investment until age 85, introduced systematic withdrawal options, and permitted up to 100% equity allocation. Reading through the amendments, one realises that NPS is looking less like a traditional pension scheme and more like a tax-advantaged investment account with retirement-oriented features.
Some commentators are worried that this dilutes the “pension” character of NPS. After all, the original philosophy was paternalistic: we know you’ll spend your retirement money unwisely, so we’ll force you to lock most of it into an annuity that pays you monthly for life. The new philosophy is: here’s your money, make your own choices.
No more one-size-fits-all
Isn’t that risky? Perhaps. But consider the alternative. The old, rigid rules assumed that every NPS subscriber had the same financial situation, family structure, health needs, and risk tolerance. In reality, no two retirements look alike. Someone may have inherited property that generates rental income. Someone else may have nothing beyond their NPS corpus. One person retires with employer-provided health insurance that continues for life; another faces the full terror of medical costs in old age. Some have children who can provide support; others have children who need support.
Given this diversity, what possible logic could justify forcing everyone to put exactly 40% of their corpus into an annuity? For someone with substantial other assets, an annuity may be unnecessary. For someone entirely dependent on NPS with no other income, even 40%may be insufficient. The one-size-fits-all rule was guaranteed to be wrong for almost everyone, just in different directions.
This is the fundamental problem with prescriptive regulation. It provides the comfort of certainty while delivering outcomes that suit nobody in particular. The system gets to say it protected citizens. The citizens get products that don’t match their lives. Everyone is satisfied in the abstract and frustrated in reality.
The better approach, which PFRDA has embraced, is to set boundaries rather than mandates. Allow a range of choices. Let people — ideally with good advice and tools — figure out what works for their specific situation. Yes, some will make poor decisions. But rigid rules weren’t preventing poor choices; they were just making different poor decisions mandatory.
This philosophy extends beyond regulation to financial planning itself. Many portfolio tools and robo-advisors fall into the same trap. They ask your age and risk tolerance, slot you into a model portfolio, and declare the job done. They assume that everyone who is 45 years old and “moderately aggressive” has the same financial life.
The NPS changes are welcome, not because flexibility is always good, but because rigidity was clearly failing. When rules force everyone down the same path regardless of where they actually need to go, the rules are the problem. The pension regulator has understood this. One hopes other parts of the financial ecosystem will follow.
Dhirendra Kumar, founder and chief executive officer of Value Research, an independent investment advisory firm.
About the Author
