Will NPS suffer at the hands of new rules?

Not only have more fund managers been invited—currently there are only six fund managers—they have also been allowed to participate in the distribution and marketing of NPS—something that was taboo in the older structure. Though the intent of the regulator is clear—to increase the penetration of NPS—the guidelines raise more doubts than provide answers. Here are the three main proposals of the new guidelines for fund managers in the private sector and the problems they pose.

More fund managers

“The idea is with increase in fund managers, the assets under management will also increase almost instantly. In case that doesn’t happen then the fund managers will continue to feel the pinch on cost," says Srikanth Meenakshi, co-founder and director, Fundsindia.com, the website facilitates NPS subscription. In other words even if the fund management charge increases, it may not give any relief to fund managers.

Agrees Gautam Bharadwaj, director, Invest India Economic Foundation, who is known to be one of the key crasftsmen of the original NPS: “I think we are fighting the wrong battle. The problem is demand and not supply. With almost 12,000 sales points, I think supply is just fine. Also, I don’t think an increase in fund managers will lead to an increase in the number of NPS subscribers simply because the distributor has products like insurance with a better incentive structure. So we will end up having a market where fund managers are chasing the same kitty. The focus has to be on driving up demand."

Also See | The NPS scheme (PDF)

Fund management cost may go up from 0.0009%

Known as the cheapest product in the world, one that has an 0.0009% annual fund management charge for retail investors, the NPS is all set to lose that moniker. Post these guidelines, fund managers can fix the fund management charge, subject to a cap that the regulator will prescribe from time to time. The cap is not known yet, but a committee is deciding this number right now.

The earlier version of NPS used the bidding method to fix the fund management charge. In 2009, UTI Asset Management Co. Ltd had quoted the lowest fund management charge of 0.0009%, which was then agreed upon by the remaining five fund managers. Though NPS has been blamed for fixing an annual charge that is too low (unit-linked insurance plans charge up to 1.35% per year and funds charge 1% currently), it was really the industry that picked up this number.

Fund managers can talk to sellers

According to the guidelines, fund managers can now talk to the sales points, something that the earlier structure frowned upon. For instance, ICICI Prudential Pension Funds Management Co. Ltd can use ICICI Bank Ltd, which is a point of sale, to push more people into investing in NPS through it.

This, the regulator believes will increase penetration, but mis-selling could be a huge cost that it may have to incur even if the guidelines suggest strict firewalls between the two entities. “PFRDA’s intention to prevent mis-selling by providing for firewalls between fund managers and sales points is appreciated. However, it is not clear as to how will this be achieved when fund managers have been asked to ‘synchronize’ their actions with that of the sales points. Any action on the part of fund managers to ‘source pension accounts’ through sales points, and joint marketing will ultimately lead to promoting the cause of the fund manager. This was not envisaged in the original design," says D. Swarup, former chairman, PFRDA, the author of the original scheme.

By allowing fund managers to participate in distribution, the guidelines have altered the structure of the NPS, which till now had blindfolded the fund manager to the source of its funds to prevent sharp sales practices and focus on their job, which is fund management alone. “The idea behind such strict firewalls was to ensure that fund managers didn’t get into distribution. NPS is supposed to be a pull product. Its low cost structure, portability, investment choices and robust architecture should incentivize customers to invest on their own. We wanted to ensure that fund managers didn’t get into distribution which can lead to mis-selling," says Swarup.

The story so far

These three changes are part of an ongoing change in NPS that began this year. In January, to increase the incentive for sales points to sell NPS, the regulator had changed the remuneration from a flat fee of ₹ 20 to 0.25% of the investment amount, subject to a minimum of ₹ 20 and maximum of ₹ 25,000.

It must be remembered that NPS was launched in 2009 to enable the unorganized workforce to save for their retirement. This voluntary scheme was the answer for around 284 million people in the informal sector who do not have access to retirement solutions. Being a retirement product for the majority of the workforce of India, its job was to ensure three things: provide a low-cost product, instill a strict saving habit for the long term and make NPS a pull product to preclude mis-selling.

NPS in its three-year run has managed to achieve the first two targets, but has faltered badly on the third. It has failed to generate interest among the workforce. So far, only about 1,05,000 people or 0.037% of the workforce have enrolled in NPS. “Which product has taken off in two to three years since inception? I think we are worrying way too much about the poor uptake. We need to give it time and create awareness," argues Swarup.

In its effort to increase the penetration, the regulator is looking through the prism of supply side alone. As a body that has been entrusted with the role of developing and regulating a product, PFRDA needs to give the concept of a pull product a fair shot. A start would be by showcasing returns on a regular basis and ensuring transparency through portfolio disclosure. Currently NPS stands at an disadvantage because only the contributions qualify for a tax deduction under section 80CCD upto the overall limit of ₹ 1 lakh under section 80C, the maturity proceeds that you withdraw as lump sum is still taxable. But that concern is likely to get addressed when the new direct taxes code sees the light of the day.

PDFby Sandeep Bhatnagar/Mint.

deepti.bh@livemint.com

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