In order to increase the footprint of the National Pension System (NPS), the sector regulator, Pension Fund Regulatory Authority of India (PFRDA), notified rules on retirement advisers last month. A retirement adviser can be an individual, firm, corporate body, registered trust or a society wanting to help potential subscribers open an NPS account or give advisory services to existing subscribers.
The concept of dedicated advisers for the pension sector was stressed on by the Bajpai committee that was set up to review investment guidelines of the NPS. The committee felt it was necessary that analysts tracked the performance of pension funds.
It is for this purpose it proposed that PFRDA institutionalise professional organisations of analysts, retirement advisers or consumer protection forums to analyse, compare and evaluate the performance for the benefit of subscribers and also for evolving benchmarks.
Accordingly, PFRDA released a concept note on retirement advisers in August 2015. Other than advisory services, it hoped the retirement advisers would also increase the penetration of NPS by creating awareness, advising people on the scheme and helping them invest in it.
The retirement adviser regulations now provides the framework for entities and individuals to register themselves as advisers. Here's a look at their role and also some concerns flagged off by the industry, But first, let's understand NPS and its architecture.
What is NPS?
NPS is a market-linked defined contribution plan that needs you to keep contributing till 60 years of age. The minimum annual contribution to the pension account is ₹6,000. Currently, there are three funds to choose from: government securities fund, fixed-income instruments other than government securities fund and equity fund (in this you can't put more than 50% of your money). At 60, you can have up to 60% of this money in a lump sum, and buy an annuity product with the rest (an annuity is a product that gives pension for life).
In terms of architecture of the private sector NPS, the central record-keeping agency (CRA) is the backbone of NPS as it works as a central repository and looks after administration and customer service functions. The pension fund managers (PFMs) are entrusted with the job of investing and managing the money and the NPS trust is responsible for taking care of the funds under NPS.
The trustee bank facilitates funds transfer across various entities and offers banking facilities under the NPS system. More commonly called distributors, PoPs are the foot soldiers responsible for soliciting customers. In fact, they are the first point of interaction for an NPS subscriber. There are about 65 PoPs, which include some of the major banks and financial services firms.
Retirement advisers
Retirement advisers will come under the category of distributors and will help subscribers enrol with the help of PoPs.
These entities will offer advisory services and help customers open an account. For this, they will need to get registered with the PFRDA.
For professionals such as lawyers and chartered accountants who provide retirement advice incidental to their practice, or entities already regulated by the PFRDA, this registration is not needed. "It's not clear if this means that even the pension fund managers will be allowed to become retirement advisers as currently they are not allowed to sell NPS," said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd.
The minimum qualification for being a retirement adviser is a graduation in any discipline. The entity or the individual will also have to be certified by the National Institute of Securities Markets (NISM), which is accredited by PFRDA.
This certificate is valid for three years. For certified financial planners (CFPs) and investment advisers registered with the Securities and Exchange Board of India (Sebi), the certificate is not mandatory. Retirement advisers will need to ensure that their activities are segregated from their other activities.
Retirement adviser's role
The primary role of a retirement adviser is to advice subscribers on NPS, help them come on board and assist them with other services under NPS. For this, they can charge a fee. The upper ceiling for on-boarding is ₹120 and will be charged only after the process is complete. For any subsequent services, like address change or fund manager change, the individual retirement adviser can also charge up to ₹20 per transaction or a maximum of ₹100 annually.
The cost of the PoP is separate. Over and above this, the regulations allow retirement advisers to charge an advisory fee. PFRDA is, however, yet to disclose the ceiling on this fee.
"Typically, the distribution cost is embedded in a financial product. It would be very difficult to charge a customer over and above the investment; plus, collecting this money will be an onerous exercise," said Shukla.
In terms of advisory services, retirement advisers will act in a fiduciary capacity towards their clients and will assist their clients at all stages of NPS, be it investment or withdrawal.
In order to help them understand and invest in the scheme, the advisers will need to do a risk profiling of the customers and collect and maintain records of all the necessary details such as age, marital status, number of dependents and information around assets and liabilities. They will have to analyse the current financial situation, recommend asset allocation and identify the goals. They will also help their clients make decisions about contributions, investment allocations and selection of pension funds in NPS.
In terms of pension funds, the retirement advisers are expected to guide and advice the subscriber about the risk and return profiles of the different financial securities and also advise on the most suitable ratio of fund allocation in each of the asset classes.
They are also expected to create awareness about the fund performance of each fund manager, including comparison of the returns of the scheme and investments made by the pension funds.
In terms of facilitating clients to invest in NPS, retirement advisers will need to tie up with PoPs to facilitate the on-boarding process and for subsequent transactions.
"Online NPS is not completely end-to-end yet. Retirement advisers are basically a second leg of distribution, so they will need to tie up with PoPs in order to fit into the architecture of NPS," added Shukla.
The charges that the PoP levy will be over and above the charges you pay to the retirement adviser. These advisers are not allowed to collect any amount in cash for investment or contribution to the pension account of the subscribers.
Will it work?
The aim of having retirement advisers is to help NPS gain traction, but there are concerns. "The regulations seem to suggest that retirement advisers will have to empanel with a PoP to on-board a customer. This makes them a sub-distributor to the PoP and not an independent entity. This is a big gap as many advisers may not be willing to tie-up with PoPs and share data. Retirement advisers should be allowed to function independently and should be able to transmit data directly to the CRA," said Manoj Nagpal, chief executive officer, Outlook Asia Pvt. Ltd.
Some suggest that PoPs may be interested in this. "PoPs who make low revenues today will be interested in becoming retirement advisers as it gives them an additional avenue for income generation. I don't really see many individuals coming forward as the cost of compliance is much more than the fees they will be able to make. These regulations need to mention the upper ceiling on the advisory fees as its attractiveness is important to create new distributors," added Shukla.
Not being able to distribute directly is also seen as a problem area as it doesn't offer prospective entities an independent platform.
"This registration does not provide us with the PoP level of facilities for data feeds from CRA or PFRDA, which are essential for maintaining a platform. Secondly, it requires us to charge the customers fees that are subject to PFRDA ceiling, which are yet to be known," said Srikanth Meenakshi, co-founder, Fundsindia.com, an online investing platform.
The regulations aim to institutionalise and professionalise retirement advice, but in their current form, the industry doesn't seem enthused.
In arrangement with HT Syndication | MINT
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