The Pension Fund Regulatory and Development Authority (PFRDA) Bill, it seems, will finally get through this monsoon session. The lack of legitimacy did not stop the regulator from rolling out the product suite for the non-government voluntary subscribers in May 2009. But the response has remained cold. Less than Rs 100 crore of general public money is with the fund managers and bulk of this from two organizations that shifted their employee pension schemes to the National Pension System (NPS). The number of hair-dressers, taxi drivers, lawyers, doctors and other self-employed Indians who do not have the privilege of a tax-free Employees’ Provident Fund Organisation account and who have subscribed to the NPS is tiny. Talk to the same people and their need for such a long-term accumulation product is large. Obviously the handshake between demand and supply is not taking place. To find out reasons for the lack of demand, PFRDA constituted a committee with G.N. Bajpai as its chairman. The committee has come to the stunning conclusion (in para 4.3): “This particular lacuna has arisen because of a combination of structural flaws in the way the product has been designed for non-government contributors, especially with reference to the involvement of all the three players in the delivery mechanism.” The report finds the lack of an “owner” of the funds the biggest problem with NPS.
Curiously, the very strengths of the NPS have been identified as their biggest problems. The committee concludes that since it is mainly incentives that sell products, the NPS must get into the bull pit and begin competing for money from life insurance and mutual funds. It recommends a 50 basis points transaction cost to the NPS so that the lacuna can be fixed. Unfortunately, the committee did not understand the sophistication of the NPS and has taken a regressive step in dealing with the issue through an old lens. The NPS is one of the best-designed products in the world and it would just take two things to get the demand flowing. One, the conflict of interest of sellers such as banks that sell an insurance plan to NPS-seeking investors must be addressed through punishing such sharp and conflicted sales practices. Two, no large pension roll-out has happened globally without the government drumming up awareness and support. Money will have to be spent to generate awareness. Not bribing agents to sell the NPS with a higher charge.
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