Promoting NPS

The National Pension System, introduced as the default retirement scheme for Central government employees in 2004 and extended to all Indian citizens in 2009, has attained some key milestones. Assets managed by it rose by 35 per cent in the past year surpassing the ₹5-lakh-crore mark in October. While government employees still dominate the scheme at over 70 lakh subscribers, the corporate and all-citizens models now feature over 24 lakh investors. But these numbers are still minuscule compared to the size of India’s 40-crore workforce. Given the lack of social security net for most employed folk and the looming risk of under-funded retirement, the NPS is in urgent need of policy tweaks to render it attractive to young savers.

Starting out as a complex and heavily taxed product, the NPS has been tweaked several times in recent years to make it more investor friendly. Relaxation in early withdrawal rules, flexibility to subscribers to stay on after 60 and tax breaks on 60 per cent of maturity proceeds are some useful changes. But there’s still some way to go before the scheme can be on par with competing products. Subscribers to NPS are required to route their transactions through designated Points of Presence (PoPs). Though the scheme boasts leading banks, brokerages and NBFCs among its 81 PoPs, these agencies make only token attempts to market the scheme, preferring to push high-cost ULIPs and mutual funds to their customers instead. This is despite the NPS commission structure being revised over the years. Having introduced electronic account opening and direct remittance of contributions, the NPS should now consider completely disintermediating all subscriber interactions, so that they can bypass PoPs. On costs, while the scheme’s management fee has been kept ultra-low at 0.01 per cent, a host of charges to compensate distributors, the record-keeping agency and custodial services have been added on. These should ideally be bundled into a single expense ratio as is the case with mutual funds. Levying early exit penalties may be a better way to deter subscribers from premature withdrawals than imposing conditions on end-use of such funds. The compulsory annuitisation feature, which forces subscribers to mandatorily purchase low-return and tax-inefficient annuity products with their retirement proceeds is one of the biggest irritants in the NPS. The scheme should instead offer annuities as an option and allow subscribers to decide on the parking grounds for their retirement kitty as the Public Provident Fund and Employee Provident Fund do. Though Central government employees make up the scheme’s mainstay they have fewer choices than private subscribers on asset allocation, which needs to be remedied.

The time appears right for the pension regulator or NPS Trust to launch a public consultation process on the scheme’s features. They should then be overhauled at one go, instead of being tweaked in a piecemeal fashion, confusing subscribers.

COMMENT NOW