Your money, your choice: Why India’s financial regulators should emulate the new NPS model

₹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.Isn't that risky? Perhaps. But consider the alternative.