PFRDA ironing out NPS glitches

Faced with the threat from a host of pension schemes launched by insurers, the Pension Fund Regulatory and Development Authority (PFRDA) is looking for ways to streamline the New Pension Scheme that was launched on May 1, 2009.

While most insurers say NPS is hardly competition, the PFRDA feels these are still early days and it would take time to assess the volumes that it intends to build up.

There is a fundamental difference between the NPS and pension schemes of insurers — while an insurance policy is largely “sold than bought”, the NPS is pitching itself as a strong product which will be “bought” rather than sold.

Pension market analysts, however, feel the selling proposition by the PFRDA may not be all that significant as it intends to keep distribution costs at the lowest.

“Individual pension plans of companies are well ensconced in the market and our distribution channels are active,” said an official with a private sector insurer. To improve sales of the NPS, the PFRDA is working on monetary incentives for its distribution channels, which includes banks and financial institutions.

Critical of the NPS, Suman Mukherjee, director of the J D Birla Institute and visiting professor of Newcastle Business School, told DNA Money, “How is the NPS a welfare scheme, if there is no assured return? Even the PPF ensures a return.” The NPS currently offers three investment fund options, with varying equity-debt investment options. One can choose to invest a maximum of 50% in the equity option. Pension funds do not have any such restriction.

However, PK Tiwari, executive director, PFRDA, said the NPS is not focussed on providing assured returns. “If someone is looking for assured returns, this is not the plan for them. NPS is a lowcost, long-term saving plan.”

The fund management charge of NPS is 0.0009% of the value of the investment, every year. In comparison, pension plans of insurance companies charge 0.75-1.75% as fund management charge, which is almost 800 times more at the lower end of 0.75% and 2000 times more at 1.75%.

Another criticism of NPS has been the Rs350 per year maintenance charge for the central record keeping agency. This was looked at as a negative point for individuals looking at investing small amounts into the NPS. Taking this into account the PFRDA board recently approved a proposal to seek reduction in this charge to Rs60 per year.

National Securities Depository Ltd, the record keeping agency, has already agreed to reduce the charge to Rs 75. “However, we will continue our negotiations till they bring it to Rs 60,” D Swarup, chariman of PFRDA recently told a newspaper. “The challenge is to bring more people in the NPS fold and we are in the process of developing flexibility in the product,” Tiwari added. The PFRDA is also lobbying with the government to pick up the charges of both the points of presence and central record keeping agency so that subscription costs are low.

The other criticism of NPS has been the long lock-in period. The PFRDA on September 24, 2009, decided to introduce a Tier 2 account, which will give more flexibility to subscribers to withdraw funds.

This will be applicable from December 1, 2009. Till now only Tier-1 accounts were available which allowed withdrawal of money only in case of marriage or medical emergencies.

But the biggest problem for NPS remains the fact that if the subscriber decides to withdraw the accumulated amount at maturity, the amount is fully taxable. The only way to get around to not paying tax is to buy immediate annuities. Other tax saving instruments like public provident fund and normal life insurance do not have this problem.