What ails National Pension System?

Over 90 per cent of subscribers in NPS are government employees. The rest invest to get tax benefits

It would seem strange that we are discussing the National Pension System (NPS), which has a 10-million plus subscribers and managing just under Rs 2 lakh crore, as an ailing institution. 
 
But, if one scratches the surface of the scheme, he would realise why is it ailing. More than 90 per cent of the subscribers are either government employees (without any choice) or from lower income groups. In the case of the latter, non-governmental organisations have done a spectacular job to bring them in, aided by a small one-time subsidy by the government.
 
Only six per cent of the subscribers are from the corporate sector, which have come in almost entirely after the amendment in the Finance Bill 2011, that allowed deductibility of employers’ contribution of 10 per cent of the salary, over and above the normal Rs 1.5 lakh under Section 80C. The balance four per cent are from the self-employed sector, again those who want to take advantage of the additional Rs 50,000 tax benefit as announced in Finance Bill 2015.
 
But, despite these exclusive tax breaks, it has many disadvantages. Yet, I am in the small minority who favour NPS. But, first, the disadvantages:
 

• Unlike its competitor — the Employees’ Provident Fund (EPF) — the maturity proceeds are not exempt from tax on retirement.
• While 60 per cent of the corpus can be withdrawn in a lump sum, only two-thirds or 40 per cent is tax-free.
• More important, the balance 40 per cent has to be compulsorily invested in buying a life-long annuity from an insurer and the annuity payment received will also be taxable. Annuities in India are a synonym for poor returns and with the tax, the returns will be even lower.
• If a fund manager is a non-performer, the choice to change your fund manager (in NPS) applies only to future contributions and the existing funds remain invested with the prior fund manager who had not performed in your opinion.
• Debt and equity funds are kept separate from each other and with restrictions on equity contributions, you are unable to get the advantages of an auto-balancing balanced fund even in a structure that allows maximum 50 per cent equity.

 
On tax parity, I suspect the Pension Fund Regulatory and Development Authority (PFRDA) can do little. But, on other features, much more can be done.
 
First, the choice of fund managers should allow shifting of the existing invested amounts also. Second, hybrid schemes which meet the parameters such as maximum exposure of 50 per cent of the portfolio to equity should be allowed, so that the benefit of self-balancing can be enjoyed by the subscribers, especially in years during which the equity markets are down.
 
Most important, on maturity, not all subscribers are looking for a low fixed amount for the rest of their lives. They might be okay with the withdrawal amount changing year on year. PFRDA can allow the withdrawal money to be invested in hybrid schemes within NPS itself. The scheme can have with a dash of equity (say 10-15 per cent), so that inflation can be provided for. Subscribers should be allowed to withdraw a fixed percentage of the corpus, depending on age, every year, thereby stretching the corpus amount over their lifetime.
 
The suggested changes are not at variance with the basic features of NPS, but could end up making it a choice that goes beyond only exclusive tax breaks.

The author is a Sebi-registered investment advisor