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For the past two decades, as the broader financial services sector boomed, the pensions sector remained in the dark.

A government-controlled and highly regulated pension system for the organized sector coupled with the absence of dedicated pension products for the unorganized sector meant that pensions were the last place to find innovation or interest from the venture capital world.

All that may now be on the cusp of change. A rise in the cap on what pension distributors (called Points of Presence or PoPs) can charge customers enacted by the Pension Funds Regulatory Authority of India (PFRDA) on 31 January may well be the trigger.

Like many startup founders, Kuldeep Parashar, founder of Pensionbox is unafraid to knock on doors. “I just turned up at the Pension Fund Regulatory and Development Authority (PFRDA) office in New Delhi one day, without knowing anyone there and told them I had a startup idea. To my surprise, the officials there took the time out to meet me," said Parashar who founded his startup in July 2021 and has secured funding from 100X VC.

According to Parashar, Pensionbox will be a dedicated application for aggregating various pension systems like Employees’ Provident Fund (EPF) and National Pension System (NPS). Having worked on the US 401(k) plans with Fidelity, Parashar sees the vast untapped potential for pension saving of India’s young population.

 

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Another firm, Singapore-headquartered pinBox solutions, offers NPS Tier 1 accounts over WhatsApp. In its ‘Gift-a-pension’ project, users can answer a series of questions over WhatsApp and seamlessly set up a pension account for their house help, drivers, or even family members.

“Unlike mutual funds where the money has to come from your account, anyone can contribute to another person’s NPS account," pinBox co-founder Gautam Bhardwaj highlighted to Mint.

Both Pensionbox and pinBox solutions have tied up with PoPs in the NPS. The former with ICICI Prudential Pension Funds Management Co. Ltd. and the latter with HDFC Pension Management Co Ltd. Unlike mutual funds, the PFRDA allows pension funds to double up as PoPs in the NPS.

Much of this revolution was previously held in check by a series of rules making business unviable. Fees that pension fund managers (PFMs) could charge were capped at a mere 0.01% (1 basis point).

PoPs who are the pension counterparts of mutual fund distributors and insurance agents could only charge up to 0.25% on each contribution. Those who contributed online through the eNPS website could cut this down further to 0.10%.

While the rules kept costs in check and benefited customers, they also stalled the growth of the NPS, allowing competing for high-commission insurance policies to fill in the gap. Insurers are regulated by the Insurance Regulatory and Development Authority (IRDA) and they also market pension plans. These policies come loaded with charges and commissions and are frequently missold.

However, under the chairmanship of Supratim Bandyopadhyay, who took office in early 2020, the PFRDA has started to unwind some of its more restrictive rules. The cap on the maximum fees that PFMs can charge was raised from 0.01% of assets under management to 0.09%.

More significantly, the PFRDA raised the cap on what PoPs can charge from 0.25% to 0.5%. This level is only slightly below what the typical mutual fund distributor gets.

Readers should note, however, that the mutual fund distributor commissions are linked to assets under management (AUM) while NPS PoP charges are on contributions. The PoP charges are also capped at 25,000 per contribution, while mutual fund commissions have no absolute level capping.

Headwinds and tailwinds

NPS as a product has a lot going for it. It is low-cost, transparent, and allows savers to invest up to 75% of their corpus in equity and benefit from the growth of India’s economy during their working life.

Unlike any other investment product, NPS also has a unique tax-saving provision, Section 80CCD(1B), where individuals can get a deduction for contributions up to 50,000 per annum.

On the flip side, however, it is rejected by individuals who want access to their money at any point. When money is invested in an NPS account, it is locked in till the age of 60 with limited withdrawals permitted for some purposes. This scares away individuals worried about emergencies or unclear about their future.

NPS Tier 2 which allows withdrawals at any point was created to fill this gap. However, the taxation of withdrawals from the NPS Tier 2 account remains uncertain.

Second, despite an increase in incentives, it still lags competing products. Insurers are allowed to deduct as much as 90% of the first-year premiums on insurance policies and subsequent year premiums can face charges of around 20%.

Mutual Fund charges are levied on AUM rather than contribution and hence, prove more lucrative for distributors over the long-term. The financial services industry is hence likely to push insurance and mutual funds rather than NPS.

Finally, rules that mandate the compulsory purchase of annuities using 40% of the corpus at maturity and restrict equity participation after the age of 50 have dimmed the appeal of the NPS. More than any of the above, the fate of the NPS depends on whether it can accommodate individual agents akin to those selling mutual funds and insurance.

The regulations for PoPs to onboard such agents were unveiled in August 2021. However, such agents will have to share revenue with PoPs and this is capped at 0.5% per contribution.

“PFRDA has released guidelines for individuals to enrol as agents for PoPs and we will start enrolling them soon. But remuneration is still a challenge here as other products have a much higher commission," said a CEO of a major pension fund on condition of anonymity.

If the regulator can provide a remunerative model for intermediaries without putting off customers, pension-tech can indeed replicate India’s fintech boom.

ABOUT THE AUTHOR
Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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