India's pension fund regulator Yogesh Agarwal is clear that the national pension system (NPS) is a sound vehicle to build a retirement n...
India's pension fund regulator Yogesh Agarwal is clear that the national pension system (NPS) is a sound vehicle to build a retirement nest.
Yet, it has few volunteer individual members. The reasons are well-known. There's no incentive for anyone to market the NPS, its transaction costs are high for a small contributor and the fund management charges are waferthin, depriving fund managers of incentives to perform. Agarwal is keen on a coursecorrection, but says he needs to take the government into confidence before making any changes in the incentive structure. "After all, we can't forget that 75% of the funds are from the central government quota," he says.
The NPS, set up to manage pension funds of civil servants who joined service after January 1, 2004 and later volunteer members, has over 2.4 million subscribers. "We made a fundamental mistake while extending NPS to the so-called unorganised sector or volunteer members. We forgot that someone had to play a role in marketing the product and that necessarily involved incentivisation. We simply assumed that the NPS would sell like hot-cakes. Given the state of financial literacy in the country, it was wrong to presume that investors would opt for NPS among competing financial products. There is need for an appropriate incentive structure to market the NPS," he says.
And that's essentially what apanel, chaired by the former Sebi chairman G N Bajpai, has recommended. It has suggested better financial incentives for distributors or the so-called points of presence (PoPs) - banks and financial institutions - that open NPS accounts for subscribers. Is it a good idea to pay the distributor a 0.5% commission on the amount that subscribers regularly save? Agarwal is non-committal, saying that a view is yet to be taken on the panel's recommendations. "I can't give you a time-frame as we need to consult the government before taking a decision.
But it's not necessarily the PoPs that need to be incentivised. Incentives can be given directly to the pension fund managers (PFMs) themselves. Ultimately, they are the biggest stakeholders in the whole system. At the moment, the management fee of PFMs is close to nil and, hence, they do not want to invest in promoting the scheme. Once you improve the management fees, they will have an incentive to market the scheme."
Doesn't it make sense for the government to spend money on distribution, transaction and asset management costs instead of giving a subsidy of Rs 1,000 to every voluntary NPS account? Agarwal disagrees, saying that the poor need such an incentive. Around 7.4 lakh are enrolled under NPS (Lite), meant to accumulate a retirement corpus for low-income workers.
He, however, concedes that both the volume and scale of NPS can be increased, at one stroke, if workers are allowed to migrate from the archaic Employees Provident Fund Organisation (EPFO) to the NPS.
Courtesy:ET
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