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The Real PFRDA Comes Into Existence Now, Will the Real NPS follow?

The creation of the NPS has hardly lived up to the original vision. Hopefully, the pension bill will bring about a change

At long last, after close to a decade of waiting in the Pension Fund Regulatory and Development Authority Bill has been passed by parliament. With this, the PFRDA gets statutory status. As far as the operation of the National Pension System (NPS) goes, this bill doesn't change anything on the ground. The PFRDA has been in operation since 2003 and the NPS has come into existence during this time in bits and pieces.

The NPS has descended from thinking that began in the late 90s on creating a modern broad-based pension system for India. The progenitor of NPS was a report by a committee called the Old Age Social and Income Security Project (OASIS), set up by the Ministry of Social Justice in 1998 and headed by the first SEBI Chairman, Dr SA Dave. The two obvious drivers of the whole process were changing demographics and the large future liability that the central and state governments face in the old pension system.

That report was a remarkable achievement, more so for the time. It didn't just lay down the outline of what India's ideal pension system should be, but created a detailed blueprint of the system, from the capabilities that would be required from the information-handling back-end to the principles of investment management that should be followed and the way the scheme would be promoted and expanded to the unorganised sector. The report envisaged individual retirement accounts and account holders choosing between different 'styles' of investment schemes run by a set of pension fund managers. At the same time, it designed a framework within which extremely low-cost operations would be possible. The recognition of equity as a desirable asset type for retirement savings and the emphasis on passive fund management for the same were huge steps forward.

Today, as the PFRDA is about to get going, there are two ways of looking at things. If one remembers everything that the OASIS report contained and compares that to what has actually been achieved in the 14 long years (close to half the working life of the potential beneficiary!) that have gone past, then it's hard not feel a little depressed. Back in 2003, when the PFRDA was first constituted, I wrote a long and enthusiastic cover story about the coming NPS revolution in Value Research's magazine. Yesterday, when I took out that story and re-read it, it really brought home the fact that that NPS was yet to be created.

In many key areas, the NPS as it exists is not much more than a caricature of what had been recommended. In fund management, there is one single style, which has a token neither-here-nor-there seven per cent equity assets. Some great ideas about fund managers competing with each other--and paying penalties for underperforming in the 'safe' style--are thus rendered moot.

However, in the specific task of replacing the government's old pension system and thus limiting its future liability, the NPS has obviously served its purpose. To make this part functioning, the IT back-end has evidently been created and works. The NPS's hardest challenge is its extension beyond government employees and to the unorganised sector. Three years ago, the government launched a 'Swavambalan' scheme under which it co-contributes Rs 1,000 per year to the NPS accounts of small depositors for the first three years after the opening of the account. This period was then raised to five years. Some 6.5 lakh such accounts were opened in the first two years. Of course the real test of the scheme will come after co-contribution stops.

Anyhow, whatever be the delays and the gaps, the PFRDA and the NPS now exists and will presumably move forward one way or the other. The larger a proportion of the original OASIS vision it manages to implement, the better it will be.

One potential pitfall is the nature of the PFRDA Bill. Like most Indian laws setting up regulators, this one too hands over the all rule-making to the regulator. Few of the desirable characteristics of the NPS are thus actually embedded in the law. Basically, the bill creates the PFRDA and the PFRDA creates and continues to nurture and grow a great pension system for all time to come. Hopefully.