PFRDA has given up on distributors of NPS and wants to get fund managers to push NPS. This makes no sense especially since fund companies are not able to sell even a tried and tested product like equity mutual funds after a slew of SEBI’s regulatory changes

The Pension Fund Regulatory and Development Authority (PFRDA) chairperson and former IDBI Bank chairman Yogesh Agarwal told reporters at the sidelines of a FICCI conference yesterday that point of presence (POP) service providers like banks have failed to make the New Pension System (NPS) work.

He does not think POPs will push NPS and the idea of using existing channels may not work. According to him, pension fund managers (PFMs) are the real stakeholders who should push the NPS because they are the ones who will enjoy investor funds for 30 to 40 years. He is in favour of additional incentives to PFMs that may have their own distribution channel to market NPS. Will PFMs be able to deliver, considering the fund companies' track record for selling mutual funds?

Interestingly, there are 40 financial institutions that have over 50,000 POPs. According to the regulator, only 4,000 locations are active for NPS sales. It means over 90% is still untapped. No wonder only 5,000-odd accounts have been opened in the non-government sector. The incentive for POPs in the first year is Rs100 and Rs80 thereafter. PFRDA is now giving a lump sum of Rs50 for each new account.

Like POPs, the PFMs also suffer from low incentives. They have bid for a fund management fee of a ridiculous 0.009% but the regulator seems convinced PFMs are the major stakeholders who will market NPS and hence should need additional incentive.

The price PFMs will have to pay for getting additional incentive is opening up of competition for PFMs that are currently only six. The consensus among the conference attendees was that there is no single ownership of NPS for customer service. There are entities like PFRDA, PFM, POP, and CRA (Central Recordkeeping Agency), but none as a single point of contact.

The regulator agrees that it was a mistake to assume that there will be instant demand for NPS. The realisation now is that it needs sustained marketing. The electronic poll taken at the conference showed that attendees felt equally strong about increasing incentives for POPs as well as PFMs. Let's hope the GN Bajpai Committee takes a balanced approach to address the issues with NPS.

The mutual fund industry has learnt this lesson the hard way. The ramifications of SEBI's ban on entry load last year is clearly visible today, where distributors have been virtually sidelined, leaving the industry in tatters. Since last August, there has been heavy mutual fund redemption across Asset Management Companies (AMCs).

In such a scenario, it is unthinkable that the PFRDA is trying to put the onus of selling on fund managers rather than incentivising POPs, who provide the interface between the customers and the product. Essentially, the PFRDA is asking PFMs to adopt the same broken business model that SEBI has been trying to implement, for the pension industry. Worse, PFRDA seems completely unaware of the huge fundamental difference between a pension product and other financial products like mutual funds and insurance.

A pension fund company can neither offer any product differentiation nor 'innovate' and bombard investors with a flurry of fanciful products, with matching advertisements, as insurance companies and mutual funds can do. It is difficult to comprehend how one can expect the pension fund managers to deliver results, when their investment choices are straitjacketed.

Industry experts strongly feel that the PFRDA is taking a wrong turn, saying that by shifting the responsibility of sales on to the fund managers, the PFRDA will dilute the role of these entities and can create a possible conflict of interest.

"The POP is not getting any brokerage. If there is no brokerage then why should even POPs promote this product; they have 30 products to sell today. It should be promoted by the government itself by advertising massively," said a sales head of a private fund house. 

"I don't see how they (pension fund managers) will take this additional burden of pushing NPS. Pension fund managers are very keen on equity, which is a small portion in NPS. Incentive should be based on performance rather than selling the product. A third party should sell the products, otherwise all fund managers will claim that they are the best and try to push their products," said a Mumbai-based certified financial planner (CFP). "That will destroy the pension product."