Budget 2019 increased the tax-free component of the National Pension System (NPS) maturity corpus from 40% to 60%. This has made NPS a compelling alternative to superannuation funds, which only have a 33% tax-free component. Sumit Shukla, CEO, HDFC Pension Fund, a pension fund manager in NPS, talks about this difference and the challenges and opportunities before NPS.
Why should anyone invest in NPS?
If you have a retirement goal, NPS should be in your basket. One big benefit is the tax benefit—whether you are salaried or self-employed. Also, the charges in NPS are very low. The tax benefit, the structure of the product, the government monitoring of the product, and investment quality given the cost, are a few reasons why you should be a part of NPS. I believe that it should be made mandatory for citizens of India—that’s how we can protect future generations from a hard retirement.
The Employees’ Provident Fund Organisation (EPFO) has reportedly agreed to allow EPF members to switch to NPS in return for a reverse option. What are your thoughts on this?
It is a very good idea. We have a track record of five to seven years and our returns are 10.5-11%, while EPF’s return is 8.5-9%. There is an extra return you can make by being invested in NPS. EPF largely makes debt investments. In NPS, you get the opportunity of an equity allocation of 50-75%. The cost of running EPF, although paid by corporates, is 3.5-4%. If you merge it into NPS, all that cost will go away. It’s a reform that has to be done. Employees, especially younger ones, don’t consider EPF a part of their investment. Instead, in the first five years of the job, if they see a sizeable NPS corpus, they will get excited about saving for retirement. Put retirement savings in one place and let the customer be the king.
A number of fintech firms such as Paytm have got points of presence (PoP) licence. Has this caused an uptick in the flows?
It is a good initiative. NPS is a good product and they should be selling a good product. I don’t think Paytm has launched their PoP yet. The problem with NPS today is that nobody sells it—banks or non-banks. Anyone who sells it will have a free run. We are welcoming it in a big way.
Pension fund manager fees are capped at 0.01% of the corpus in NPS. Does this make managing a pension fund viable?
No, it doesn’t make it viable. We are all loss-making. In perpetuity, we will be loss making. The regulator is also seized of the matter. They understand that if the franchisees do not make money, they will not survive. Sooner or later, they will have to do something about making an NPS franchisee a profitable entity. At this juncture, we make 0.01%. Half of that goes as a fee to the regulator. So we actually make 0.005%. Our brokerage alone is much higher than the fees we make. Even government pension managers, which have large corpuses, are all into debt. The regulator has to fix this. If the franchisees does not make money, they will not put the right people in research or the right kind of people in investment and subscribers will suffer. We have already seen that one entity has moved out of the business.
Some NPS equity funds have underperformed the index. Should NPS have index funds as well?
I think NPS should be actively managed. Some NPS funds have underperformed but they will catch up. Some fund managers have not put the right kind of infrastructure into place. If they had done so, they would’ve beaten the index. Yes, there are subscribers who want index funds. So if some innovation can be made, index funds should be allowed. You need to have both active and index funds.
The Pension Fund Regulatory and Development Authority (PFRDA) allowed government subscribers to switch pension fund managers and asset allocation several months ago. How have these reforms worked out?
They have not taken off at all because the regulator has to come back on the legacy funds (existing corpus of subscribers). Switching is only open to new employees of the government. We have got a few subscribers who have opted for us but it’s not substantial in our overall assets under management (AUM). The regulator also has to actively do marketing and canvassing with government offices to tell people that this facility is available. Otherwise no one will ever come to know that such a change has happened. People don’t know how to change pension fund managers.
What difference are superannuation funds making to NPS enrolment? Are there any advantages of switching from superannuation funds to NPS?
It’s a huge advantage. People are using and should use it. In superannuation funds, you get a 33% tax-free amount on retirement; in NPS, you get 60% tax-free amount. If you buy annuity from a superannuation fund, you have to pay 1.8% GST; in NPS, the GST is zero. Also, in NPS, you manage the fund. It’s a little cumbersome to move from a superannuation fund to NPS but we are seeing corporates do it. A guy who is retiring should necessarily shift from superannuation to NPS.
PFRDA hiked the cap on equity investment in NPS to 75% in 2018. Has there been an impact?
Our equity percentage of AUM has started moving up. It will take time. The enhanced cap is only available to people younger than 50. However, the process is simple and people are taking it up.