Comment

This story is about a public sector undertaking (PSU) which came up with the ultimate refrigerator.

With its standard features enhanced by the lowest market price, and much lower power consumption, the refrigerator was quite a buy. The company then appointed a dealer network which was experienced in selling consumer durables of other manufacturers.
So confident was the company of its superior product backed by good dealer network, it did not feel the need for any advertising and even paid peanuts to its dealers as compensation. Also, it offered no warranty on the product.

The refrigerator was launched. Six months later, the time had come for the company to take stock of sales. The verdict was clear. In spite of being a superior product, the ultimate refrigerator was just not taking off. Customers were not even aware of the product. The dealers made no attempt to sell the product to customers who walked into their showrooms, as they were not making any money on the sales.

In fact, the few customers who had read about the product in newspapers and came asking for it were skillfully diverted to other competing products. Why? Because the dealers made more money on the other products, even though they were not as good.
Clearly, the manufacturers dogma — if you make a good product, consumers will come and get it — had taken a beating here.

If, in this analogy, we substitute the Pension Fund Regulatory and Development Authority (PFRDA) for the PSU refrigerator manufacturer, banks (point of purchase) for the dealers and the New Pension Scheme (NPS) for the new refrigerator and lack of guaranteed returns for the absence of warranty, you have the similar result.

Let’s analyse the scenario in detail:

The high household savings rate in India has been much touted. Perhaps this drives the thought that investors have no choice but to channel a part of their savings in this otherwise excellent long term savings scheme. However, most individual savers in India prefer traditional savings instruments such as land, gold and bank fixed deposits.

One thing common among these instruments is that they require a one time investment with no obligations on making a regular contribution over time. In fact, even the relatively newer products such as PPF, NSC, etc, which are safe and provide good returns, need support from individual sales agents to make sure that the operational difficulties in investing in these products is taken care of.

This kind of investment naturally favours the relatively better-off people, since they would have the lump-sum available to invest. The whole concept of systematically saving money and investing it over time to fulfil a financial goal requires discipline and commitment.

NPS is a good scheme, but it is still a tough sell, especially as return is not guaranteed. Such products need both — wide publicity as well as reasonable incentives to sellers.

Unfortunately, both are lacking in the otherwise excellent pension scheme. NPS also suffers from tax disadvantage vis-a-vis other savings products. Moreover, the general awareness of the product itself is quite low.

Another potential future issue is the extremely low fund management charges paid to the fund managers. To give you an idea, if the fund house is managing Rs 10,000 crore of funds, the total payout will be Rs 9 lakh, which is not even enough to cover the salary cost of a single executive.

Obviously, either the managers hope to make some money in some other manner (brokerage etc for their sister companies, perhaps) or will perhaps loose interest in the business over time. Anyway, this will become a problem only at a future date when the scheme becomes popular.

I hope that after the proposed tax changes take effect in 2011, we will also see changes in the selling structures and incentives for all the stakeholders in the NPS.

I wish that this unique scheme, which can be a boon for Indian investors looking for long-term disciplined savings, does not meet the same fate as that of mythical PSU refrigerator manufacturer mentioned above.

The writer is CEO, Apna Paisa, a search comparison
engine for loans, insurance and investments. He can
be reached at hrdna@apnapaisa.com