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Will Yogesh Agarwal create a moral hazard for the New Pension Scheme?

If the new PFRDA head's current ideas take shape, NPS may need to be bailed out some day like UTI was

Yogesh Agarwal, the new regulator of the Pension Fund Regulatory and Development Authority (PFRDA), is hell-bent on making the New Pension Scheme (NPS) work.

Mr Agarwal, who took over as the PFRDA chairman on 7th June, is talking about changing the incentive structure of the scheme and making significant other changes. However, if he puts all this articulation into action, he could end up messing the NPS. It will not only destroy the very thoughtful DNA of the scheme, but, in the long run, create a situation of forced government bailouts at the cost of taxpayers. 

Mr Agarwal is setting up a committee under former SEBI (Securities and Exchange Board of India) chairman GN Bajpai to revamp the NPS. But even before that, he has articulated his thoughts on how to energise the scheme. In an interview published by Business Standard today, he says that his idea is to incentivise fund managers, who have been whining that they are losing money on the NPS and an increased corpus only increases their losses. Mr Agarwal's idea is to free the fund managers' fees and make pension fund management open to all fund companies in the silly belief that the best fund manager will attract all the assets.

This deep belief that free-market ideas work well for the financial sector would be touching if only the memories of what happened in the US in 2008 were not so fresh. The US suffered a financial crisis mainly because free-market ideas in housing finance and derivatives did not lead to competition and increased efficiency but only a one-way increase in greed and a nationwide breakdown of risk assessment among the savviest market experts.

If Mr Agarwal plans to change the scheme, won't the existing NPS have to be disbanded and the money returned to investors and fresh bids called? After all, the fund companies are contract-bound to manage the current money at the current fees. Savvy fund managers, who ought to have understood the costs and who were perfectly aware that there was no incentive to sell the NPS, had made considered bids to bag the contracts. If there is a dramatic change in the structure of the scheme, it cannot happen by merely giving investors an exit route. If Mr Agarwal is allowed to do that, it is nothing but a government-backed sleight of hand, which will take advantage of the poor financial literacy in the country.

Worse, it will also sow the seeds for moral hazard over the long term. Like it or not, the NPS is seen as a government-backed scheme. Finance minister Pranab Mukherjee has only underlined this by promising to put Rs1,000 into each new pension account under the Swavalamban in the Union Budget of February 2010. This means that any losses or mess will ultimately have to be borne by the exchequer and will come out of the taxpayers' pockets.

What we need on the NPS is not a new committee and some tinkering, but an end to the turmoil in the incentive structure of all financial products that are sold to ordinary investors with no financial knowledge - this would include mutual funds, insurance or now, the NPS.

Each regulator has tinkered with products under its domain and in every case, it has led to a huge outflow of funds. Mutual funds are reeling under quick-fire changes forced by SEBI; IRDA has recently unleashed changes, whose impact is still to be assessed and now PFRDA is planning to change a scheme that is sold as a long-term investment to ordinary people.




7 years ago

PFRDA should understand that one entity should be there who will be mediator between the scheme and investor


7 years ago

I am very interested to know about NPS. Please let me know the details about NPS and where can I purchase Nps. Currently except UTI Which funds are participating in this scheme.



In Reply to SHYAM SUNDAR SHARMA 7 years ago

Hi Shyam,

You can get all details here:

Keshav B Bhat

7 years ago

It is pity that people think if fund managers incentives are increased the fund will perform better. Some people think if the fund management charges are redused the fund will give better retuns to the investor. Every one thinks he or she has to get all the benefits but others shoud sacrifice everything. If fuel price increases everyone like auto/taxi transport, comodities prices etc incresas. the financial products distributors are punished by redusing their commissions giving a lame excuse that no of distributors are misselling the products how funny!

Keshav B bhat

Narendra Doshi

7 years ago

BIG YES. WE NEED an end to the turmoil in the incentive structure of ALL FINANCIAL PRODUCTS THAT ARE SOLD TO ORDINARY INVESTORS - this would include mutual funds, insurance NPS ETC ETC.



In Reply to Narendra Doshi 7 years ago

yes ! I agree with you all financial products should be sold in ration shop. goverment should subsidise the cost and give all investors return only no incentive to fund manager, service provider all should work free of cost. WOW what a socialist mindset

Sugar decontrol decision after assessing cane output: Pawar

New Delhi; Food minister Sharad Pawar today said that any decision on decontrolling the sugar sector will be taken only after assessing the likely production for the next year and keeping the interest of the consumers in mind, reports PTI.

"I will collect the information about total production by the end of August. It (decontrolling the sugar sector) depends upon what is the area availability in the country. Then it will depend upon what is the production," Mr Pawar told mediamen on the sidelines of an ICAR function here.

At present, the government controls the sugar sector right from fixing the support price of cane to fixing the quantity of the sweetener to be sold in the open market every month.

"We don't want to take any decision which will ultimately affect the consumers. We have to protect the interest of the consumers, farmers and industry all together," Mr Pawar added.

Indian Sugar Mills Association (ISMA) and the National Federation of Co-operative Sugar Factories (NFCSF), two bodies representing the sector, have been urging the government to do away with the monthly release mechanism, procure public distribution scheme (PDS) sugar from the market and remove sugar from the purview of Essential Commodities Act among others.

"We are open to discussions. I have requested NFCSF and ISMA representatives that, if they want to communicate their views, certainly, we are ready to sit with them. I think tomorrow or day after, we are sitting, subject to discussion in Parliament," he said.

Mr Pawar, however, had earlier this month said that the time was ripe for the government to give a serious thought to decontrolling the sugar industry in the wake of better prospects of sugar production in 2010-11 crop year.

Both the government and the industry feel that the country would produce more sugar next year than the estimated annual demand of 23 million tonnes. India, the world's second largest producer of sugar and the biggest consumer, produced 18.8 million tonnes in 2009-10 crop year ending September.

However, the food ministry's plan to decontrol the sector drew flak from some quarters, who believe that the move would escalate the price of the sweetener to over Rs60 a kg.

Maharashtra Congress spokesperson Kanhaiyalal Gidwani had said yesterday that decontrolling sugar would only benefit commodity trading gamblers and hoarders as the Centre would have no powers to check the price and availability.


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