2011 uneventful, major reforms on the anvil

Though NPS is struggling to find its place on the investment plate, it has all the right ingredients to make it a palatable long-term retirement vehicle

Deepti Bhaskaran, Mint, 27/12/2011

source: http://www.livemint.com/2011/12/27204304/2011-uneventful-major-reforms.html

Two reasons got 2011 to pass uneventfully for the National Pension System (NPS). First, the government’s own ally Trinamool Congress sought more time from the Prime Minister to discuss the issue before passing the Pension Fund Regulatory and Development Authority Bill, 2011 (PFRDA Bill). Two, with less than 1 million subscribers, out of a workforce of at least 275 million in the unorganized sector, the participation is unimpressive.

The year did see some serious deliberations on making NPS popular, with the PFRDA setting up a committee headed by G.N. Bajpai, the former chairman of the Securities and Exchange Board of India, to look into ways to make NPS sell better. The committee recommended broad basing the distribution network by allowing mobile telecommunication service providers, some fast-moving consumer goods companies and third-party vendors to distribute NPS. Currently, it is mainly being sold through banks.

The report also suggested pension fund managers (PFMs) be allowed to distribute products, but indirectly. According to the report, PFMs have been the worst hit by the slow growth of NPS. This is because while the distributors, known as the points of presence (POPs), have other revenue streams and the Central Recordkeeping Agency, or CRA, has a captive government business, PFMs can only fall back on the funds received. Currently, the fund management charge is 0.0009% per annum and this hurts the PFMs if the corpus is small. The report suggested that PFMs be given a direct role in selling NPS but in order to preclude any chances of mis-selling, the committee recommended that PFMs be allowed to sell NPS indirectly through a POP in their larger company structure or by floating POP subsidiaries.

The committee also recommended that the fee or commission be made a percentage of the investment. Currently, the fee is fixed at Rs.40 for first-time registration and Rs.20 for subsequent transactions. This flat fee, the committee felt, would hurt low-value investors. A fee of 0.5% of the investment, subject to a minimum of Rs. 20 and maximum of Rs. 50,000 has been suggested.

However, these recommendations are expected to take shape only next year. Says Yogesh Agarwal, chairman, PFRDA: “We should be announcing the new guidelines by January next year.”

The regulator is also contemplating increasing the fund management charge (FMC). Says Biswajit Mohanty, managing director and CEO, SBI Pension Funds Pvt. Ltd: “The indication is that FMC will be rationalized so that fund managers make a small profit.”

The next 12 months may be crucial for NPS as important reforms are on the anvil. Meanwhile, PFRDA can focus on bringing about more transparency. To begin with, some fund managers do not display their net asset values since inception nor are the benchmarks or the portfolio disclosed. Says Agarwal: “We are constantly reviewing disclosures. But for now whatever needs to be disclosed is available on the websites of the PFMs.”

Should you invest?

Though NPS is struggling to find its place on the investment plate, it has all the right ingredients to make it a palatable long-term retirement vehicle. As advised earlier, if you have a provident fund or superannuation plan with your employer, you do not need to invest in NPS. Those without access to such plans should look at NPS for long-term wealth creation.

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Your Money in the Employees Provident Fund may be in Trouble!!

source: Forward Mail

For the first time in 60 years the Provident Fund (PF) office may miss its deadline for presenting its accounts to the Parliament. This predicament is due to violation of accounting standards by the EPFO’s book-keeping system and thereby not conforming to the format specified by the Government which in turn has delayed clearing of PF office’s accounts by the Comptroller and Auditor General (CAG) of India.

In the recent past the PF office discovered a surplus of 1,733 crore and recommended a 9.5% PF rate. The Finance Ministry agreed to the 9.5% rate on the condition that the PF office updates all the member accounts within six months and ensure there is no shortfall in income. On both the counts, the EPFO has failed to deliver.

Moreover, nearly 4.85 crore accounts were still to be updated on November 22, 2011, as per EPFO’s submissions to its board’s finance committee last week. More critical is the admission that it had made a huge 5.7% error in its income estimates for 2010-11 that led to an eventual income shortfall of 854 crore. Given that it now manages a corpus of 4,66,000 crore, an error of this magnitude is alarming. With interest payments promised at 9.5%, the PF office ended up with a 510 crore deficit on its 2010-11 operations – which it will now be forced to fund from its income for 2011-12.

This accounting fiasco may have forced EPFO to recommend a 1.25% cut in the EPF rate so that it doesn’t end up with more contingent liabilities. But there are other pressure points which will make it hard to explain when the Finance Minister reviews its state of affairs and the minutes of the EPFO board’s finance committee. EPFO officials had hoped to boost income for 2011-12 with a decision to stop interest credits from April 2011 on old inoperative accounts, where no fresh contributions have come for three years or more. They had hoped to use the savings from these accounts to fund a higher EPF rate for the year.

In our opinion the EPFO should be strictly held accountable in mis-handling employees provident fund accounts. There needs to be more governance and untimely rate hikes should not be allowed as they turn out to be just a gimmick, and when interest rates are reduced have a detrimental impact on retirement savings. Management of such crucial funds should be done with utmost care take into account the interests’ of several people, and Government should step-in in such dire times.

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How to get the most out of small savings schemes

Arnav Pandya, 19/12/11 Financial Chronicle

source: http://www.mydigitalfc.com/personal-finance/how-get-most-out-small-savings-schemes-316

The small savings landscape has changed with the overhaul of the different instruments that are available in the market. While freeing up interest rates by linking them to the interest rate of securities in the debt market is one of the changes involved, there are several other changes that investors will face when they want to make investments over the coming days.

Understanding these changes is a very important part of the entire investment process because the investor needs to know exactly what is available and how he should be going about completing his investments. Here is a look at relevant changes.

Kisan Vikas Patra (KVP): The Kisan Vikas Patra has been an investment instrument that has been in existence for a long time and was also popular. However, a lot of investments in KVP were being made in cash, and, hence, it came to be regarded as an instrument that was being used for hiding wealth.

This instrument, which offered around 8.41 per cent yields for investors, has now been discontinued from December 1, 2011, therefore, investors will no longer be able to buy any additional KVPs for investment requirements. Now, investors will have to choose between the other alternatives that are available for investment.

National Savings Certificate (NSC): There has been a major change in National Savings Certificates. Up until December 1, these were instruments, which paid 8 per cent yield that was compounded half-yearly, giving a yield of 8.16 per cent, with a maturity of six years. Now, the features of this instrument have been changed and the difference will be visible on many fronts.

First, the tenure of the investment has come down with the end result that the six-year instrument will no longer be available, but the time has actually been reduced to five years. The new interest rate on the instrument is 8.40 per cent for the five-year period and the figure will be 8.7 per cent for the 10-year instrument.

Earlier, there was only a single instrument that was available for investment, but, now, there is a longer-term option. Investors now have to make a choice about the time period for which they want to lock in their investment. Investors who do not want any worries on interest rate risks should lock into the longer-period instrument when they expect rates to remain low during the interim period, although, it is very difficult to take a 10-year view on interest rates in such uncertain times.

Monthly Income Plan (MIP): One of the biggest changes will, however, be witnessed in case of the post office Monthly Income Plan. The old plan was discontinued from December 1 and now there is a new plan. Again, this will have multiple implications. In the past, the instrument was operational for six years, but now, this tenure will no longer be valid. New investment tenure will be for five years.

There is another aspect to this investment and this is in the form of a bonus paid at the time of maturity. This was an incentive for the investor to remain invested till the time of maturity because it would enable the investor to get a bonus of 5 per cent. This will no longer be available, so in case, the investor remains invested till the end of five years, there will be no bonus coming in. The only relief is that the interest rate has gone up to 8.2 per cent over the life of the new instrument.

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