There is no shortage of people who seem ready and eager to brand the New Pension System (NPS) a failure and recommend major surgery on it.
Recently, there has been a spate of such articles, seemingly triggered by opinions expressed by the new chairman of the Pension Fund Regulatory and Development Authority (PFRDA) in interviews with the media. The focus seems to be on the fact that since no one makes any money out of the NPS, no one is going to push it to customers. The idea is that the low cost structure is fine for the government pensions, but should be changed for selling NPS as a discretionary product to private individuals. At this point, perhaps it would be good to examine how exactly is the NPS functioning in the government sector (the so-called Tier-I
accounts) and whether it is delivering what was promised. The original idea was that each government employee would have an individual pension account into which 10 per cent of his salary would go and the government would put a matching 10 per cent. This money was then invested by one of six pension fund managers in one of three schemes which offer different mix of equities and different types of bonds.
One of the great things about this scheme was that an individual would be able to make decisions about his investments. He would get a periodic account statement and would be able to see how his money was doing. He had the discretion to switch among different fund managers and different schemes based on what he felt he needed. For example, he could opt for a higher equity exposure if he felt that he should earn higher returns when he was far from retirement. More importantly, the investment value of his pension kitty would become transparent to him, and would be under his control, as befits a defined contribution system.
Unfortunately, this hasn’t happened. The tier-I pension system for government employees has simply not been executed in that way. The money is not there in individual accounts of each government employee but is handled as a lump sum and is distributed among fund managers and put in one of the three schemes in a default manner.
Perhaps the powers that be should explain to government employees that despite this being a defined contribution system and the government is not answerable for the investment returns, why is the government then making the decisions? Before spending so much time and energy on fixing the Tier-II NPS, wouldn’t it be a better idea to properly implement the Tier-I system? If you are a government employee who has joined since January 2004, then you should understand that you yourself are responsible for your pension, not the government. However, the government has not given you any means to do anything about it. You should be asking doing some hard thinking and asking some tough questions before it’s too late.