With just a few thousand subscribers, the New Pension Scheme is clearly not working. Giving PFRDA funds to create awareness is a good idea since, right now, no one else has an incentive in promoting it
Former Chairman, PFRDA
Since the NPS has a direct-selling model to keep the costs low and to avoid the urge to mis-sell, it’ll take time to take off. If PFRDA is incentivised, it can help spread awareness
The New Pension System (NPS) has been arguably hailed as one of the best designed pension products domestically, if not internationally. It comes with several unique features like full portability across jobs and geographical jurisdictions, choice of investment options to suit different risk appetites, option to choose from among several fund managers, no entry or exit loads, and perhaps the lowest fund management charges in the world. And the product is supervised by a dedicated regulator. This appears to be a near-ideal situation. But the NPS has not attracted many retail customers.
Critics believe that the NPS has “failed to take off” because no one is pushing it, like mutual funds and insurance products. The NPS adopted a direct selling model to keep the costs low and to avoid the urge to mis-sell due to the embedded commissions. This distributor-free and agent-free model was designed to protect the individual and to maximise her pension wealth. It was adopted even at the risk of a slow start.
The NPS architecture has been designed to create an enabling environment for the citizens to save for retirement. It is a voluntary long-term savings product which should, no doubt, be incentivised but not pushed. The central government has already provided some incentive by way of a co-contribution of Rs 1,000 every year to subscribers till March 31, 2013. In fact, the government would do well to provide incentives to the front office of the Pension Fund Regulatory and Development Authority (PFRDA), i.e. the points of presence, to popularise the product and enroll more retail customers. After all, the central government does pay for Public Provident Fund (PPF) collections. And PPF is viewed more as a tax avoidance financial instrument than as a long-term savings product. This is evident from the fact that a considerable amount of “round tripping” takes place in PPF after the seventh year. The time has come to correct this anomaly and gradually phase out PPF and promote the NPS, which is truly a product to provide old-age income security.
Some analysts are of the view that it is not viable to manage NPS funds because of the phenomenally low costs. They need to be reminded that such costs were determined through a transparent price discovery mechanism and not fixed administratively. Fund management of the Employees Provident Fund Organisation (EPFO) corpus, it is understood, is being done at even lower costs. Critics will immediately point out that managing EPFO accumulations is viable at low costs because of a very high corpus. The NPS managers need to be patient. The corpus will grow exponentially if (i) fiscal incentives are provided to NPS contributions and accumulations on a par with other similar products and (ii) there is public awareness about its distinguishing features. The government has already made its intention clear in the draft tax code to bring the NPS under the exempt-exempt-exempt (EEE) tax regime. This will go a long way towards bringing in retail customers. As for creating public awareness, the efforts have been slow and sporadic, not because of lack of will or lack of a strategy but primarily because the government and the regulator wished to keep a low profile for want of legislative backing. Admittedly, one cannot wait indefinitely. The product has come to stay and should be publicised like any other similar product.
Till the NPS enrolls more and more retail customers, focus should be on generating a critical mass by enrolling large numbers through employer-linked schemes and through aggregretors under the NPS-Lite scheme which PFRDA has already initiated. Large employers like NALCO, DVC and banks ( through the Indian Banks’ Association) are already slated to join the NPS.
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To sum up, it is premature to review the well-designed architecture at this stage, and the outcome of the intended tax benefits and increased awareness are awaited. If, despite these measures, the retail response is less than encouraging, we should then think about making changes.
CEO, UTI Retirement Solutions Limited
The incentive structure for the financial advisers, who are crucial for selling and marketing the product, should be made more lucrative, on a par with other products
The New Pension System (NPS) is a defined contribution scheme — unlike the Employee Provident Fund (EPF) or the Public Provident Fund (PPF) where returns are guaranteed by the government — which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The investment in the NPS cannot be withdrawn until maturity/retirement and, upon retirement, a part of your corpus can be withdrawn as lump sum, and the balance will be mandatorily paid out as pension annuity. The scheme, which can be availed of by any individual between 18 and 55 years, resident or non-resident, has a well laid out architecture consisting of a central recordkeeping agency (CRA), pension fund managers (PFMs), points of presence (PoPs), trustee bank and custodian (Stock Holding Corporation of India Ltd). You can specify how you want your money invested — an informed subscriber may go for an active choice and can opt for a maximum 50 per cent equity and the remaining in debt, whereas others can opt for an auto choice where equity and debt component will be a function of their age. Under auto choice, till the age of 35, equity exposure would be 50 per cent and the remaining will be invested in debt. However, after that, the equity component will keep on reducing. This will reach the level of 10 per cent on completion of 55 years of age.
The NPS has both fixed and variable costs that reduce its fund value, but these are the lowest among the current retirement products and defined contribution schemes. The fixed costs comprise CRA charges, a one-time Rs 50 as account opening cost and issuance of the permanent retirement account number; annual maintenance charges of Rs 350; Rs 10 for each time you put in the money, PoP charges; annual custodian charges of 0.0075-0.05 per cent of the fund value, annual fund management charges of 0.0009 per cent of the fund value. The contributions also qualify for tax benefits, but the amount is taxable at the time of withdrawal — this is unlike EPF and PPF which are EEE (exemptions on contributions made, exemptions on accumulations, however taxable on maturity). However, the Direct Taxes Code has proposed that the NPS also be made EEE.
The returns under the NPS are likely to be higher than the traditional debt investments, such as post office schemes, bank deposits, etc., due to presence of equity elements in the investment portfolio. However, the risk is likely to be much lower than in the case of equity-oriented mutual funds. This is because investment in equity is allowed through Index Funds only and exposure to equity has been kept at 50 per cent.
The NPS also provides flexibility to subscribers where they can switch their pension funds among three options, i.e. equity, corporate bonds and government securities. They can also change their fund managers if they are not satisfied with PFMs’ performance.
Although the system has a well laid out architecture, it has not been able to draw enough attention from the individual subscribers. This is probably due to the very little marketing, lack of publicity, lack of investor awareness, an element of uncertainty about the quantum of the retirement corpus as well as the quantum of pension and the current uncertainty about its taxability status.
The government should immediately form a committee to look into these aspects and suggest remedial actions. It needs to be understood that retirement products have to be sold to customers; they are seldom demanded by customers. It is also wishful thinking to feel that since there is a good product, people will line up to buy that product. In all parts of the world, financial products are sold, not bought. Selling and marketing of the products require marketing intermediaries or financial advisers. And this requires that the incentive structure for these financial advisers be made more lucrative, all the more so given the commissions advisers get while selling other products like insurance and mutual funds. The role of pension fund managers also may be expanded by increasing the fund management fee and making them responsible for marketing the NPS product.