Deepti Bhaskaran, Mint 26/1/2012
Though commissions have increased a bit, NPS remains the cheapest market-linked retirement vehicle
Troubled by the poor uptake of National Pension System, or NPS, the Pension Fund Regulatory and Development Authority (PFRDA) has changed the incentive structure for the distributors from a fixed sum to a percentage of the investment amount.
This will serve two purposes—one, bringing about a more equitable incentive structure and two, to incentivize the distributors to push NPS. Till now the points of presence or the distributors got a flat Rs. 20 as initial subscription charge and Rs. 20 for any subsequent investment.
Taking a recommendation by the G.N. Bajpai committee—constituted by PFRDA to review NPS—forward, the pension regulator has fixed the incentive at 0.25% of the subscription amount; the committee had suggested 0.50% of the investment, subject to a minimum of Rs. 20 and maximum of Rs. 50,000.
Now a distributor will get a flat Rs. 100 on initial subscription and 0.25% of the initial subscription amount. Moving on, every year on subsequent investments, the point of presence will be entitled to 0.25% of that amount. But the minimum that a point of presence can charge is Rs. 20 and the maximum Rs. 25,000.
The committee had observed that the earlier structure was amounting to the poor subsidizing the rich—a person investing Rs. 6,000 and a person investingRs. 1 lakh were both paying Rs. 20. Also the fixed sum was acting as a deterrent to sell NPS amid better commissions-yielding products such as insurance policies.
NPS which launched in May 2009 was primarily targeted at the unorganized sector, which does not have any form of social security. Despite the crying need for social security and NPS being the answer, so far only about 1 million people out of a workforce of about 400 million in the unorganized sector have joined NPS. This apparent increase in commission, the regulator hopes, will push NPS sales.
What it means for you?
The commissions have increased a tad bit, but NPS remains arguably the cheapest market-linked product. Since unit-linked pension plans are clouded by regulatory guidelines and are not available in the market, we compared NPS with mutual funds. At an expense ratio of just 1% per annum, a Rs. 1 lakh contribution every year in a mutual fund would yield a lump sum of around Rs.1.46 crore in 30 years, assuming the growth is at 10%. On the other hand, a fund management cost of 0.0009%, NPS would return around Rs. 1.8 crore for the same return and tenor.
In fact, cost-wise NPS has become better. With the increase in the number of subscribers, central record-keeping agency (CRA) charges have come down from Rs. 350 to Rs. 280, which is expected to reduce further as volumes increase. Even the transaction charge that CRA levies has come down to Rs. 6 per transaction. In addition, NPS now allows only one-time investment; earlier, you had to invest at least four times, which meant you paid the distributor and the CRA at least four times in a year.
What’s in the pipeline?
There may be more reforms in the pipeline. The Bajpai committee has also 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, NPS is being sold mainly through banks. The committee has also suggested that pension fund managers be allowed to distribute products.
Also the fund management charge of 0.0009% is hurting the fund managers, who have been lobbying hard to review it. Says Yogesh Agarwal, chairman, PFRDA: “We are reviewing the fund management cost and will come out with fresh guidelines shortly.”
What should you do?
The reforms in NPS are yet to play out fully. But even as the regulator balances the expectations of the industry and the benefits for the investors, NPS is a good retirement option for you. If you have a provident fund or superannuation plan with your employer, you may not need to invest in NPS. Also, if you have an appetite for risk, NPS may not be for you. NPS allows equity exposure only up to 50% of the investment amount. However, for conservative investors looking for retirement vehicles, NPS is a good proposition.
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