NPS Gets a Push

When we first heard about the National Pension Scheme about a decade ago, we thought this would be a revolutionary step to provide Indian citizens a retirement with dignity. What went wrong?
Let me try and explain to you why the NPS has not turned out to be the success that it was envisaged to be. First of all, it is important to categorize the three segments which constitute NPS.
First we have the central and the state governments. The NPS for the central and state government employees is very well on track. Out of the 30 state and seven union territories, only three states have not joined the NPS. The other 27 have signed up for the NPS. Of these, 17 states have also started making their fund contribution and the rest are in the process of doing the same.
But, the litmus for NPS is its success in the private sector. That is where mistakes were made while extending it from 2009. The basic difference is that NPS is mandatory for government employees. But the participation is voluntary for the private sector. Which means one has to build in the elements of marketing and distribution. When you sell a scheme which is mandatory in the government sector to the private sector, you cannot expect to sell it like hot cakes. You have to remember that it is a financial product and if it is a financial product it is competing for savings with products from banking, insurance and mutual fund sector. And that is where the marketing and distribution element comes in which is currently lacking.

It is just the cost element that is much touted….
The emphasis at the very start was on controlling costs. You are right - it was touted as the cheapest product available. But what is the point of having a cheap product which nobody buys? It is like the silence of the graveyard where nothing happens.
There was no stakeholder for marketing and distribution involved during the launch of the scheme and that is why there are so many people today who want to open an NPS account but don’t know where to go for it. There is nobody to advise such people where to go. People want questions answered. If they invest in the NPS will they be better off or not? If yes, then why? Does this offer a better return than a fixed deposit? How does it compare with mutual funds? How does it compare with a pension scheme from an insurance company? Because of the low literacy level in the country there is all the more reason to speak of the benefits of the NPS. We need to explain how this investment will grow vis-à-vis other competing products.
They wanted a bidding process for the fund managers. I don’t understand why one would need the bidding process - we are not selling coal or 2G.

Everything else being equal, cost will be the difference and expensive managers will have their own long-term impact.
Expenses have to be managed. But it can’t be wished away totally. Several of the pension fund managers I talked to said that it is a completely loss-making business and they might have to actually sell it. Sure you can’t beat the market but if somebody invests in something, he should earn out of it. If he loses, he will close down the business. Why should he continue? Also, they went for the process of appointing pension fund managers for three years. One cannot do business in this manner. I cannot setup a car showroom and go away after three years. It’s a long term product but you appoint fund managers for just three years? After that they are not sure whether their license will be renewed or not. And even in these three years, if he keeps on making losses, how is he going to sustain? This has to be cost effective. Pension funds charge 0.0009 per cent per annum which is actually free. Some competing products charge 20-30 per cent which is the other extreme. There is a huge different between these two figures. The cost has to be kept at a level where it is financially viable. Don’t give him the earth but offer him something better. This can be achieved only by market forces where you put a cap on the fee that they can charge but it should not be uniform. For the government scheme it can be uniform because it is mandatory and no marketing is involved.
This is a beautifully designed product - the CRA structure, complete portability and the tax treatment. The private player has to go out to the potential investor and how can he attract him if there is a flat fee to be charged? The concept of pension in India has not been understood beyond the realm of government. Someone has to explain it to the people. And this non-government sector is 87 per cent of the population. They have not heard about this concept at all.
When I talked to ladies at Sewa Bank in Ahmedabad they were surprised that they can save for income in their old age. Their understanding is that they have to work for a lifetime to make ends meet. But somebody has to explain the product before someone buys it and that entails costs. Every additional account in this scenario will increase the cost for those selling the scheme.

What are you doing to incentivise the marketing of NPS?
Keeping all these things in mind, I had set up the Bajpai Committee in September after coming here in June last year. This committee consists of eminent people like GN Bajpai, former chairman of LIC and SEBI, Deepak Satvalekar, former MD at HDFC Life; Nachiket Mor, former MD at ICICI Trust and Abhinandan Jain, professor of marketing in IIM-Ahmedabad.
The committee questioned the method of limiting the number of pension fund managers. These managers are anyway working like AMCs. It is my job as a regulator to see if the work is being done properly or not. I can’t put these people on a tight leash. I have to let market forces operate. And if there is any mis-selling that is where I step in. As a regulator my job is to check this malpractice.
Ultimately, it is the pension fund manager who will be the real stakeholder because he will have the fund for 30-35 years and his performance will determine the returns on the investment. The Bajpai Committee also suggested to do away with the cap on the number of fund managers and let them charge their own fees and put an upper limit on it. Let them compete after that. In the US, bigger the fund, lower the fees as they are able to spread the costs.

You increased the incentive for PoP…..
In the distribution aspect, the PoP, such as banks, are only going to be given Rs 20. Do you think a bank for Rs 20 will waste its resources and manpower? When I made this statement as chairman of IDBI that banks have better things to do, I was criticized for it. But even for group insurance products banks are paid. So how can we expect NPS to be a success? Unless I incentivize PoP, no one will sell my product.
On the recommendation of the Bajpai Committee I increased the incentive of PoP from January 16, 2012, by 0.25 ad valorem. For opening an account and any funds transmitted anytime, 0.25 per cent of funds transmitted per transaction. On an average, the remittance would be Rs 10,000 which makes it Rs 25 per transaction. This is the money the PoP will get.

What about the government incentivising accounts up to Rs 10,000 per annum?
The government has approved the guidelines for the Swavalamban Scheme which was announced in the Finance Minister’s Budget speech of 2010-11. The scheme is applicable to all citizens in the unorganised sector who join the NPS subject to their meeting the eligibility criteria. Under this scheme, the central government will contribute Rs 1,000 per year to each NPS account opened in the year 2010-11 and for the next three years (2011-12, 2012-13, 2013-14). To be eligible, a person will have to make a minimum contribution of Rs 1,000 and maximum contribution of Rs 12,000 per annum, for both Tier-I and Tier-II accounts taken together. These guidelines have also been placed on our website.
By last count we had about 8 lakh accounts and the number of those who could avail of the subsidy was 3.5 lakh. We now issue monthly statements to people and they can view their account anytime. They get account statements every year too. It is mandatory. I would like to make one clarification: none of the government employees of pre-2004 era opted for the new scheme despite being offered a chance of higher returns.

A parliamentary committee recently said that there has to be a return guarantee?
Actually they are wary of the returns and there is a huge gap in the comprehension and understanding between a market person and a government employee. They want some sort of guaranteed return. Offer the person a choice to invest 100 per cent in government bonds which is already there.

Are greater tax benefits the way to popularize it further?
NPS enjoys a unique and significant tax advantage as investments in it up to 10 per cent of a person’s basic pay is exempt from tax under section 80CCD(2). This is over and above the Rs lakh under Section 80C and Rs 20,000 under section 80CCF. Investment in NPS has the potential to lower one’s tax rate besides tax sheltered accumulation.

When do you think you will be able to be a credible substitute on the regulatory side?
The credibility of the regulator comes with its age like RBI, SEBI, IRDA. We are the youngest financial regulator. By the time a pension regulator was thought of, pension funds were already on offer by all. The pension landscape is very fragmented today. Today a person has to mandatorily subscribe to EPFO. At least give him the choice to move to NPS. When EPFO came into existence, there was no NPS. But it is here today and is a beautiful product. That is when the credibility of the regulator is established.
So, if the issues like marketing and distribution coupled with choice to migrate from EPFO to NPS is made, then we will see a renewed momentum. We have a quarterly performance review of all the fund managers too done by the NPS trust. It has various parameters to judge the fund managers. We came across instances where pension fund managers had invested in state government loans. We have no issues with investing in central government loans but you have to be choosy while investing in state government loans as not all states are in good financial health. So such investments have a cap of 10 per cent.
Second is there should be no exposure to group companies.
A set of guidelines are already in place.

NPS: New Pension Scheme / PFRDA: Pension Fund Regulatory and Development Authority / LIC: Life Insurance Corporation of India / SEBI: Securities & Exchange Board of India / AMC: Asset Management Company / PoP: Points of Presence / RBI: Reserve Bank of India / IRDA: Insurance Regulatory Development Authority / EPFO: Employees’ Provident Fund Organisation