New Delhi, August 03: Despite incentives announced by the Finance Minister in the Union Budget, not many people have opted for the New Pension Scheme (NPS) as a saving tool for retirement needs.
Now in its fourth month of operation, the NPS, the lone government-sponsored retirement plan for the informal sector, has managed to attract just 1,100 subscribers in a country of more than a billion. Total assets under management now stand at a little over Rs 1 crore.
Conceived after ten years of research, discussions and heated debates by various think tanks, politicians and committees, the scheme finally kicked off this May Day.
The seeds for pension reforms in the country had been sown in 1998 when the Ministry of Social Justice and Empowerment commissioned Project OASIS. Presenting the Union Budget in 2001, then Finance Minister Yashwant Sinha had laid the road map for a new structured, defined contribution pension scheme for civil servants and general public.
The scheme in its original form allowed greater equity exposure and was considered the safest way to channelise the country’s pension monies and ensure high returns. But the conservative attitude of some of the political parties led to change in the architecture of the plan. In 2003, the Department of Economic Affairs notified NPS for Central government employees.
It took five more years for the government to offer this safety net to 87 per cent of the country’s population that works in the informal sector and has no recourse for saving retirement money. Now, marred by low investor awareness and tax-related issues, the scheme has managed to get just 350 subscribers in its first month of operation and a total subscription amount of Rs 6 lakh.
“People are not yet fully aware of the benefits of the scheme. Lack of knowledge and financial literacy among people are some of the bottlenecks that haven’t allowed the scheme to take off fully. We plan to launch our series of awareness campaign soon,” said D Swarup, chairman, Pension Fund Regulatory and Development Authority (PFRDA).
On July 6, Finance Minister Pranab Mukherjee cleared some confusion and extended tax benefits under Section 80CCD to self-employed people as well. The government also exempted the NPS Trust from paying any Dividend Distribution Tax and Securities Transaction Tax on the sale and purchase of equity and derivative, which is likely to benefit investors in the form of higher returns.
All merits of the scheme seem to have been eclipsed by lack of intermediaries. At present, the onus of marketing and promotion relies solely on the regulator. There are no intermediaries. Fund managers, who receive a paltry charge of 0.0009 per cent, do not see much of an incentive to market this scheme.
The points of presence (PoPs), on the other hand, promote products that fetch them higher commissions. “There are no incentives for a PoP to sell the product. We only get Rs 40 as commission. A lot more than this is spent as the courier cost,” said one of the PoPs requesting anonymity.
“NPS is very well conceptualised and serves as an ideal vehicle for retirement planning. However, there are no intermediaries to promote and sell this product. The regulator is relying on word of mouth promotion only which will not help the scheme take off,” said Balram Bhagat, chief executive officer and whole-time director, UTI Retirement Solutions.
“There are no incentives for us to promote the product. All over the world, pension fund managers on an average charge 10 to 15 basis points as fund management fee. But here we are being paid just 0.0009 per cent. PFRDA should take a re-look at this fee. Higher FMC will also encourage us to market the scheme,” added Bhagat.
Mutual fund products pay around 1.5 per cent as commission and the insurance industry is infamous for doling 10 to 20 per cent as commission to agents selling its products.
Adds Sudir Bandhopadyay, managing director, Reliance Money, one of the PoPs: “The scheme lacks marketing push. Financial products in India are sold and not bought. Being an investment product, NPS requires a push,which is missing at present.”
To avoid any kind of mis-selling, the regulator is not willing to rope in agents for the distribution of the product. The regulator will use the Rs 10 crore it has received as budgetary support from the government to promote NPS. “We will launch our campaign shortly,” said Swarup.
The regulator so far has spent close to Rs 45 lakh on just one print advertisement.
Besides this, even the minimum annual amount of Rs 6,000 per year needs to be lowered to make the scheme viable for people in the lower strata — real people for whom the scheme was designed. “We need to lower the entry amount from Rs 500 to maybe Rs 100 a month.
I think a part of the problem is that a lot of people in that income profile are not the ones who, in the current distribution framework, will access the NPS in any case.
Even if you had a lower entry amount, people will not be able to join because they might not have a bank account,” said Gautam Bhardwaj, Director, Invest India Economic Foundation. Bhardwaj was also part of the eight-member OASIS committee that was laid the first seed for this scheme.
An NPS account can be opened against a minimum single payment of Rs 500. The scheme allows minimum annual investment of Rs 6,000 through a quarterly, semi-annual or annual payment mode.
While NPS mandates at least four contributions in a year, there is no ceiling on the maximum number of transactions. The scheme is touted as the most competitive retirement plan in terms of its charge structure.
It charges 0.0009 per cent as fund management fee i.e. Rs 90 per Rs 10 lakh. Besides this, an investor has to pay Rs 485 for other charges every year.
The scheme is distributed through 22 PoPs that largely include banks and brokerage houses. These PoPs have opened 524 branches across the country to distribute the scheme.
–Agencies