Giving NPS the retail push

The National Pension System (NPS), introduced in 2004, was considered a revolutionary product attempting to provide social security to the large majority of Indians toiling in the unorganized sector. By some estimates, this number is nearly 90% of the working population of the country. Ironically, the need for this product has arisen due to some positive developments in our country. A few decades ago, people in this segment generally did not live long enough to celebrate their 60th birthdays. With greater access to medical facilities, more employment opportunities and increase in incomes, life expectancy in this segment is improving.

One could say that with greater life expectancy comes greater responsibility (misquoting a more famous quote). The responsibility is to ensure that people do not outlive their savings, stay solvent and live with dignity till the end of their lives. As per the 2011 census, only 9% of our population is above the age of 60. But this is already a large number (over 103 million people) and the proportion is only going to increase.

NPS was designed to be a mass product that would provide a low-cost vehicle to mobilize savings which can be channelized into more productive long-term investments. There was no faulting the concept but the execution has left much to be desired.

In 10 years’ time, NPS has managed only 7.9 million subscribers, out of which nearly half had no choice (government employees) while the other half were literally paid to open the account (NPS Lite has a feature where the accountholder gets a contribution of 1,000 from the government). A mere 400,000 subscribers actually made the conscious choice to open an NPS account.

What ails NPS?

Though NPS is expected to largely benefit workers in the unorganized sectors, it is important for retail middle-class investors also to participate. One reason for this is, of course, the fact that a lot of retail middle-class investors also work in the unorganized sector and could do with retirement savings. Another reason is that retail investors would bring a great deal of scrutiny to the programme. Since such investors would be making a conscious choice between competing investment avenues such as bank deposits, mutual funds and others, they would be far more demanding of NPS. The overall cost of servicing and investments would decrease only with larger numbers and a greater corpus.

In addition to the lack of adequate tax incentives, the other hurdle faced by retail investors is with regard to opening an NPS account. Very few service providers provide a seamless interface to open an NPS account. Most investors having identified a service provider have to undergo the entire know-your-customer exercise, including filling up a physical form. Once the account is opened, cases have been cited where the contributions take anywhere from 10 to 20 days to get credited into the account.

This issue can be resolved if banks and other service providers could be instructed to open NPS accounts for their customers based on their existing data rather than have them fill up additional forms. Also, it may be worthwhile for NPS to mimic the mutual fund industry in terms of daily cut-offs and two-day credits to accounts.

Under the current structure, NPS has two types of accounts—a tier 1 account, which is the pension account and is mandatory, while the tier 2 account is an investment account, which is optional. A retail investor who is interested in the tier 2 account as an investment option will look at returns vis-a-vis similar products. The calculation of returns becomes important as does access to this money (liquidity) and the consequent trade-offs. To make this comparison in the mutual fund world, Securities and Exchange Board of India (Sebi) has instituted a standard format, which gives the returns of the scheme across various time periods. The Pension Fund Regulatory and Development Authority’s website provides only a file containing net asset values, which will then have to be imported into a spreadsheet programme and worked on to provide returns. Recently, returns provided by the schemes for FY2012-13 have been uploaded on the site.

A leaf could be taken from Sebi’s book and a standard performance reporting format be designed, which needs to be updated if not daily then at least weekly. It will also be useful to have this match the performance reporting formats of other products in the comparison set, such as mutual funds.

NPS serves a need that is basic and vital for the development of the country. The rising prices of healthcare and the increasing incidence of lifestyle diseases along with higher life expectancy is a heady combination which could result in a serious catastrophe in the years to come. There could be a situation where the elderly, due to the lack of financial security, simply throw themselves at the mercy of the government and the government may be hard pressed to handle their requirements. Getting the elderly financially secure would go a long way in avoiding such a disaster. NPS may be the right tool for this but the tool now needs to be adopted by a significantly larger number of people.

Sreeram Sivaramakrishnan is associate professor; School of Business Management, Narsee Monjee Institute of Management Studies.