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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

NPS gets flexible in a product revision

You may soon be able to make partial withdrawals from your account in the National Pension System

Soon you will be able to withdraw money from your National Pension System (NPS) account to meet big ticket expenditures such as treatment of a critical illness, buying your first house or education for your kids. Keeping in view the provision of the Pension Fund Regulatory and Development Authority Act, 2013, to allow partial withdrawals of up to 25% of the contributions, PFRDA, the governing body of NPS has released draft guidelines on the frequency of and purposes eligible for partial withdrawals.

Another significant change is that the Pension Fund Regulatory and Development Authority (PFRDA) will once again select pension fund managers (PFMs) for the private sector NPS through bidding. Read on to understand how these changes will impact NPS and what it means for you.

Partial withdrawal

The primary NPS account—also called tier-1 or the individual pension account—is a long-term product with a lock-in till 60 years of age. If you wish to withdraw an amount before you turn 60, you will need to annuitize at least 80% of the corpus. However, on maturity, you can keep up to 60% of the retirement corpus as lump sum and annuitize the remaining 40% (annuity is a pension product that gives periodic income for life).

Being a pension product, the strict lock-in is to encourage long-term savings, but that also made NPS illiquid and investors uncomfortable. To address these issues without diluting the long-term nature of NPS, the PFRDA Act recommended partial withdrawals up to 25% of the contributions made to the NPS account. The draft, issued on 15 January, takes the proposal forward by recommending that an investor be allowed to make her first withdrawal after completing and contributing for 10 years.

Partial withdrawals can be made for big expenses such as children’s marriage, including a legally adopted child, construction or purchase of first house and treatment for critical illness for self, spouse or kids. Some of these are cancer, a major organ transplant, coronary artery bypass graft, stroke, first heart attack and coma. The draft has specified 13 such critical illnesses (see the entire list on www.pfrda.org.in or on http://goo.gl/cJrstM ).

According to the draft, an investor can make only three withdrawals of up to 25% each during the tenor and with a gap of five years between each. This gap, however, will not be applicable for critical illnesses. “PFRDA has tried to match the purposes that are eligible for partial withdrawal from Employees’ Provident Fund. The liquidity option is good and 25% limit is fair. Too much leeway will mean there isn’t enough left for retirement savings," says Suresh Sadagopan, founder, Ladder7 Financial Advisories, a financial planning firm.

NPS is essentially a long-term product and Mint Money advises you against pre-mature withdrawals. Instead, make goal specific investments, insure your life and health, and make provisions for emergency funds.

Comments on the draft are welcome till 15 February.

PFRDA, however, is yet to clarify on the second most important provision of the PFRDA Act—allowing guaranteed funds, i.e., an assured minimum returns. As of now, your investments are market-linked.

The fund managers

When NPS was launched in 2009 for the public, six PFMs were selected through a bidding process. These were ICICI Prudential Pension Fund Management Co. Ltd, IDFC Pension Fund Management Co. Ltd, Kotak Mahindra Pension Fund Ltd, Reliance Capital Pension Fund Ltd, SBI Pension Funds Pvt. Ltd and UTI Retirement Solutions Ltd.

UTI Asset Management Co. Ltd, at that time, quoted the lowest investment management fee of 0.0009%. The remaining five fund managers agreed to this. But finding the margin too thin, IDFC Pension Fund exited in 2012. Following this, PFRDA, under Yogesh Agarwal, removed the bidding process and capped the investment management fee at 0.25%.

Apart from this, to increase NPS’ footprint, PFRDA opened the doors to more PFMs and allowed them to participate in marketing and distribution within the overall cost of 0.25%. Not everyone agreed with this. “PFRDA should revert to keeping PFMs confined to fund management alone and rethink distribution, perhaps by investing in creating awareness and rethinking the incentive structure," says Gautam Bhardwaj, co-founder, Invest India Micro Pension Services, and one of the craftsmen of NPS. The recent guidelines are silent on this front.

Even though PFRDA wanted more fund managers, not many have come forward. So far, only two PFMs have made debut: HDFC Pension Management Co. Ltd and DSP BlackRock Pension Fund Managers Pvt. Ltd. LIC Pension Fund Ltd, which manages the government corpus, also entered the private sector, taking the total tally to eight. PFRDA now wants to limit the number of PFMs to eight through yet another bidding exercise. “The process of bidding is a positive step as it helps establish serious companies. Nothing is decided arbitrarily; in that sense, one can’t question the selection of PFMs. It also helps in price discovery, but the regulator will need to be careful and ensure that entities don’t end up bidding an unsustainable fee like last time," says Biswajit Mohanty, managing director and chief executive officer, SBI Pension Fund. All the existing PFMs and the potential entities will have to submit bids based on certain commercial and technical parameters such as investment management fee, financial strength and track record in managing equity and debt asset classes. Three PFMs—LIC Pension Fund, SBI Pension Funds and UTI Retirement Solutions—also manage government money, and will only have to submit commercial bids since they already qualify on the technical benchmarks.

PFRDA will select eight PFMs; if there is a tie in score, the existing PFMs will get preference. The licence will be given for a period of five years.

Mint Money spoke to a cross section of the industry regarding this. Many responded, on condition of anonymity, that the move would only disrupt the efforts of the PFMs made thus far. A chief executive officer of a pension fund company (who didn’t want to be named as the bidding process is on) commented that NPS was struggling and repeating the entire process of becoming a PFM would not help matters.

Others argued that if there is no bidding for banking licence, then why have one for NPS. Bidding may draw the lowest investment management fee but that may not always drive numbers; in fact, it may compromise quality.

PFMs have to submit their bids by 14 February and the regulators will declare the selection by 4 March. PFRDA would also do well to go back to the original design and isolate the PFMs from marketing the pension scheme. NPS is likely to go through some more changes, track this space for updates.

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