Poor start to pension scheme

“Pension nahi yeh PRAN hai,” says a banner at one of the points-of-sale for the New Pension Scheme (NPS) that was launched on May 1. But the banners, meant to create awareness about the retirement planning tool of the Pension Fund Regulatory and Development Authority (PFRDA) with extremely low charges, are not a common sight at most branches nominated to offer PRAN accounts.

Of the 48 points of sale, including bank branches in Mumbai, few push for the sale of NPS, though the situation was marginally better than the last time DNA went hunting for NPS forms in May.

After visiting 12 points of purchase in the city, DNA ended up with four forms for opening PRAN accounts, compared to only one that was available after visiting 17 branches in May.

Of the four locations that provided NPS forms, two explained the scheme in detail and advised on the future steps for investment.

However, the going was not easy at other locations. The managers of two South Mumbai branches of banks didn’t know anything about NPS. “New Pension Scheme, what are you saying? Please get correct details and then come,” was their response.

Only 1,629 NPS forms have been sold at 731 nominated points of sale, according to figures released by the PFRDA. Figures are not available on how many PRAN accounts have been opened.

A chief financial officer of a life insurance company tells DNA: “NPS doesn’t offer commission and has hardly managed to open any accounts.” The absence of commission is a major hurdle in the scheme’s promotion. The only money banks make is Rs20 every time you invest in NPS through them.

The managers of the bank branches visited seemed to be more interested in pushing plans from insurance companies. “Ma’am, would you like to have a look at this pension plan offered by a life insurance company? You can invest for three years and stop paying, but in NPS you have to invest for a longer period,” says a relationship manager at a large private sector bank, which also runs an insurance company.

“NPS doesn’t give you a debt and equity balance option,” she says, an incorrect statement since NPS allows investors to divide funds between equity and debt.
This misinformation or lack of interest stems from the fact that banks make up to 7% of the premium paid as commission by selling plans offered by life insurance companies.
So, if you invest Rs10,000 in a pension plan through a bank, it is likely to make up to Rs700 as commission as against Rs20 in the case of NPS.

“The commission structure is such that no point of purchase will sell NPS or mutual funds, especially when there are other products offering higher commission,” says a Delhi-based observer of financial products. “It’s a demand pull product. Consumers will have to get smart to buy NPS. As an analyst, I don’t find anything wrong with the product structure,” she adds.

According to Anil Rego, CEO & founder, Right Horizons, another reason for NPS not doing well is that the distribution is limited to a few banks. “Considering the low-cost structure, the ability to use a distribution network is limited. Also, the ability of companies [to spend] on advertising and marketing is limited,” he says.

Raunak Roongta, a Mumbai-based personal financial planner, says: “I haven’t got any client asking about the product. Even if asked, servicing of the product doesn’t fit into my budget.”

The other problem is that the NPS corpus, if withdrawn at maturity, is fully taxable. In case of pension plans, one third of the accumulated corpus can be withdrawn free of tax.

The government plans to correct this when it enforces the exempt-exempt-taxed regime under the new direct tax code in April 2011.