January 18, 2016

National Pension System: Hurdles In Maximising Reach

Gaurav Malhotra

With a fast increasing working population, it is imminent that citizens plan for retirement. For this, there has to be equal participation of all forces of the financial ecosystem to spread awareness about NPS

In today's competitive market, where customers' centricity is the driving force of all business activities, National Pension System (NPS), an affordable scheme promising social security to all the citizens of India, is not publicised enough to create awareness to maximise its subscribers. What we see, in newspapers and billboards are the promotional campaigns run by Pension Fund Regulatory and Development Authority (PFRDA) which fall way short of the efforts required to promote NPS, especially in the private sector.

Earlier, the Government provided definite pension to its employees after retirement but from 1 Jan, 2004, Government made it mandatory for new government employees (except armed forces) to contribute to NPS.

PFRDA has also made NPS available to all citizens of India, including private sector employees, with effect from 1st May, 2009 on a voluntary basis. However, even after 6 years, participation by private enterprises and its employees is below the expected rate. This could be due to lack of employer's interest in introducing NPS and lack of awareness among the private sector employees.

NPS has the lowest fund management fee (for corporate and individual NPS) capped at 0.25 per cent when compared to mutual funds or superannuation plans. On top of it, all the five fund managers of the NPS have delivered aboveaverage, market-beating returns across asset classes and timelines.

Despite scoring well on performance and cost, NPS failed on the awareness front. The fault lies with the incentive structure for intermediaries wherein Point of Presence (an entity authorised to register subscribers in NPS) used to get `20 per account irrespective of the amount invested and fund managers got just 0.0009 per cent of the corpus as annual fee. So, most of the intermediaries, fund managers or POP did not push the product. Therefore, despite having 14000 Point of Presence - Service Providers (POP-SPs - performs functions relating to registration of subscribers), NPS has not been subscribed as much as it should have been.

The PFRDA, acting on a report of the GN Bajpai Committee, has now overhauled the incentive structure and introduced some key reforms for making NPS a popular and more acceptable product. Some of these are:

1. Higher fee to intermediaries.

2. Fund managers can continue beyond the period of three years earlier fixed for their tenure and can now continue as long as they want.

3. Budget 2015-16 introduced an additional income tax deduction of `50,000 for contribution to NPS under Section 80CCD (1B) of the Income Tax Act, 1961.

4. Employees own contribution is eligible for tax deduction under sec 80 CCD (1) of Income Tax Act up to 10% of salary (Basic + DA). This is within the overall ceiling of `1.50 Lacs under Sec. 80 CCE of the Income Tax Act.

5. Additional tax benefit on contribution up to 10 per cent of basic salary and dearness allowance (DA) made by an employer towards the NPS account of an employee under Section 80CCD (ii) of the Income Tax Act, 1961.

6. Premature withdrawal is allowed up to 20% in tier I account and after 60 years, one has to invest minimum 40% of accumulated savings in life annuity. The remaining amount may be withdrawn in lump sum or in phased manner between age 60 and 70 years.

However, despite the clear efforts to make NPS a best-suited retirement product for the customers and intermediaries, there are few more anomalies where regulatory intervention is required by sectoral regulators.

It is worthwhile to note that PFRDA provides that banks and insurers can become POP whereas IRDAI in the year 2009 had not allowed the insurers to act as a POP. This has further cut down the scope and reach of NPS. Allowing insurers to act as POP would allow 50+ insurers to do NPS marketing through their 20000+ offices spread across India. Considering the large scope of penetration of NPS through insurers, IRDAI may reconsider its directions to the insurers which were issued way back in 2009.

Considering the development phase of our economy, where the working population is increasing at a fast pace, it becomes imminent that its citizens plan for retirement, specially keeping in light the inflation and decreasing value of currency. This is only possible when there is equal participation of all forces of our financial ecosystem to contribute towards spreading awareness about NPS and promoting people to plan for retirement and social security.


Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.

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