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A Different NPS, but Better?

The Bajpai committee's report suggests wide and deep changes in the NPS. What does it mean for the scheme's future?

Can the NPS be resuscitated by implementing the recommendations of the Bajpai committee that were made public last week? This committee was set up by the NDA government in September last year to review NPS. It's clear from the report that the committee examined all aspects of the NPS and has made recommendations to fix a wide range of ills that the NPS has.

Some of these are problems that existing investors have, some are problems of expanding the NPS to enough customers, some are problems that the pension fund managers have, and some that the banks who sell the product have.

From the recommendations that the Bajpai committee has made, it's interesting to work backwards and see what it perceives as problems and what the solutions are. Let's take as examples the major recommendations. The report calls for higher and more flexible investments in equity in a variety of ways.

In a staged manner, it wants higher equity exposure to the extent of 50 per cent (up from the current 15) in the statutory plans, then 75 per cent and then unlimited, it wants the investment universe expanded to the NSE100 from the Nifty/Sensex, it wants to allow active management of equity assets, it wants to bring in a wider range of assets including private equity, Real Estate Investment Trusts (REITs), mortgage-backed securities, CBLOs, Alternative Investment Funds, IDRs, repo and reverse repo, commodities and more. Eventually, in the last phase of its recommendations, the committee wants all limitations on asset types removed, leaving only a negative list which will be based on the experience of the earlier phases.

Taken in context, it's an impressive, even breathtaking list. Most of it is not even allowed in regular mutual funds. We live in a system where 15 per cent long-term equity investment in stable large cap stocks is considered equivalent to letting fund managers loose with cash and a pack of playing cards on Diwali eve. Does anyone really think that this set of recommendations has any hope of ever being accepted? Surely not. My sense is that these recommendations are like an opening gambit in a negotiation where you claim a position from where you will have to inch back. Or, they are a sort of rhetorical/ideological statement.

In any case, the committee clearly thinks that it's of utmost importance to pursue higher returns. The current level of returns introduce some volatility without making a noticeable impact on actual returns. Along with this, the committee also wants members/investors to be able to choose their own plan and thus assume responsibility for fine tuning their own risk and returns level.

At the other end of the member spectrum, the committee recommends that the minimum participation amount should be lowered from ₹6,000 a year to ₹1000 and the Swambalam scheme expanded and extended. It also wants some of the fixed amount fees changed to percentages so that members depositing small amounts can afford the scheme. Clearly, it thinks that there are potential members at the bottom of the pyramid who are unable to qualify for the scheme.

On the provider side, the committee wants private fund managers to be allowed to manage government pension funds. So far, government funds are well above 90 per cent of the total NPS corpus and all of this is reserved for public sector funds. For comparison, LIC Pension Fund is managing about ₹24,000 crores while the largest private fund, ICICI Prudential, is at around ₹350 crore. Along with this, it wants higher fund management fees, as well as a distribution system where there is some ownership of a customer account by someone. Currently, the distributed structure means that there is no one who is in-charge of taking care of the customer.

It's easy to get distracted by the minutiae of the advice. However, taken as a whole, there is a definite direction that many of these recommendations take, which is moving the NPS more towards a mutual fund type of structure. Higher equity, more investor choice, more asset choice, higher fund management fees, 'ownership' of a customer, presumably, along with a monetary reward for such ownership. That sounds much like a much smaller variation on mutual funds than the current NPS. Are we being told that that was the basic flaw in the NPS vision?