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Home / Opinion / Online-views /  PFRDA shouldn’t push a pull product

The National Pension System (NPS) was put in place in view of the fact that there was no formal pension system for the unorganized sector. The other gap point was to reduce the fiscal stress on the balance sheet of the state due to defined benefit pensions by shifting new government employees to a defined contribution pension system.

The NPS product was carefully designed by meshing the above two objectives to create a robust pension solution to bring compelling benefits of economies of scale, technology for transparency of information and easy access and a choice of professional fund managers to the participants.

With the mandatory participation of new government employees, the total number of pension retirement accounts numbers in the NPS have crossed 4 million with total assets under management (AUM) of at least 25,000 crore as of December 2012. With the current rate of contributions from existing and additional government employees, it is estimated that the AUM for NPS will cross 50,000 crore by June 2014 and 1 trillion by December 2015.

Is all well with NPS?

The key issue which the Pensions Fund Regulatory and Development Authority (PFRDA) and NPS struggle with is insignificant participation from the private unorganized sector. The private sector is just not enthused with NPS. There are around 175,000 accounts from the private sector in NPS and most of them are through the corporate route.

To take advantage of the newly added sections 80CCD(2) and 36(1)(IVA)—which provide tax deduction to NPS contributions of up to 10% of the salary to both the employee and the employer—some 300-plus corporates have subscribed to NPS. This gives corporate employees an option—in addition to the Employees’ Provident Fund Organization—for their retirement savings. Though PFRDA is enthused by this participation, it remains marginal and will not take NPS to the vast unorganized sector not covered by any pension system, which was the core objective of NPS.

PFRDA “pushing" NPS

The push: PFRDA continues to believe that it is the lack of “push" factors that contribute to this disinterest in NPS. And to be fair to PFRDA, it has been taking steps it believes will create a “push" for the NPS. In this process, PFRDA has changed some basic structures: enhancing point-of-purchase margins, increasing fund management fees of pension fund managers, creating a new plan for corporates in line with the central government scheme hastily (then withdrawing it after three months) and allowing fund managers to actively solicit NPS contributions. The initial experience tends to point that these changes are not leading NPS to its desired goals though it is too early to infer that these have not worked. But effectively these “push" steps by PFRDA have “contaminated" NPS.

The impact: By allowing different cost structures for the private sector and government employees, it takes away the basic advantage of economies of scale that NPS was supposed to offer. That a government employee should be charged 0.0102% and a “normal" citizen be charged up to 0.25% (25 times more) for the same fund management in NPS is unreasonable. PFRDA argues that even with these cost additions, the total cost will not exceed 0.50% in NPS and this will yet be among the cheapest financial products. What they fail to mention is that PFRDA still allows and most fund managers do invest the NPS contributions in index funds of mutual funds, which have an underlying charge of 1.0-1.5%. Thus, the effective cost for an NPS is now around 1.5-2.0% for passive index fund management which makes it the costliest in the world. In addition, by creating multiple and separate plans for private sector rather than a single underlying portfolio for each asset class across central, state government employees and private sector the costs have increased. A simple change towards this will lead to the original envisaged low cost structure of NPS.

The “pull" factors that need focus

PFRDA has consistently shied away from focusing on “pull" factors and underlying needs of the investor. Some believe that if the government changes the tax structure from EET (exempt-exempt-tax) to EEE (exempt-exempt-exempt), then investors will throng to NPS. However, this may not be sufficient to instill confidence in investors to turn to NPS.

The contributions in NPS are long term—almost 40-50 years considering both the accumulation period (20-30 years) and the annuity period (15-20 years). For such a long-term investment, the investor seeks an environment which exhibits transparency, ease of access of relevant information, feedback loop on performance and above all strong regulation leading to high levels of confidence.

These factors are missing currently. So if you want to know the performance of various fund managers before investing, you will be mostly disappointed. The closest you come on PFRDA’s website is that the link for net asset values (NAVs) takes the investor to the website of National Securities and Depository Ltd’s Central Recordkeeping Agency, which provides a performance link back to the PFRDA webpage. When you access this you get the performance data as on 31 March 2011. When you access the section on fund managers on the PFRDA website, some of the links take you to the website of pension products provided by life insurance companies and not that of NPS. Portfolio data and historic NAV information of some fund managers is available but not amenable to inference or analysis or in a standardized format. Such availability of dated and disjointed information pushes away the potential early investors creating a crisis of confidence. What the investor needs is a seamless experience which embeds and builds confidence in each step of his retirement planning process either on his own or through his adviser/distributor. These are “pull" factors that PFRDA needs to focus on.

Manoj Nagpal is CEO, Outlook Asia Capital, a wealth management firm.

Visit www.livemint.com on 28 February, Thursday, at 3pm for a live chat on tax. Ankur Sharma, co-founder and CEO, TaxSpanner.com, will answer queries regarding budget tax proposals and its affects on your income.

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