Experts point out wrinkles in the New Pension Scheme

The pension regulator needs to take a deeper look into what is weighing down the scheme. Here are a few issues that need to be sorted out, say experts

The pension regulator, Pension Fund Regulatory and Development Authority (PFRDA) has reportedly sought tax relief on investments in the New Pension Scheme (NPS) to put the struggling scheme on a level playing field with other long-term savings schemes. Currently, under the Exempt-Exempt-Tax (EET) system, this proposed shift to the Exempt-Exempt-Exempt (EEE) regime would remove the tax burden at the time of withdrawal. Although parity on the tax front is long overdue, NPS suffers from a host of other issues that are also preventing it from taking off.

The biggest issue facing NPS is uncertainty in the minds of the investing public. Since the scheme does not provide assured returns compared to a scheme like Public Provident Fund (PPF) or the government’s traditional pension scheme (which is subject to revisions), investors are sceptical about the actual kitty they would ultimately end up with. Although the NPS managed a healthy 12% return last year, it had more to do with the phenomenal stock market rally rather than anything else. The performance has to be seen in this context. There is no visibility as to how the NPS will perform over a longer period of time. There has to be much more publicity about this.

Awareness about the scheme and its working is also low. The regulator has sought to address this issue by embarking on a promotion campaign, but some branches of designated points of presence (PoPs) also seem to be unaware about the modalities of the NPS. Sandeep Chimanlal Vasa, a certified financial planner, pointed out to Moneylife that when some of his clients approached a large bank designated as a PoP, the officials there were not even aware about the scheme, far from advising the clients the long term investing philosophy behind NPS.

The biggest issue is the confidence about the payouts, decades from now. Mr Vasa also pointed out that his clients were uncertain as to how the payouts would be handled. “They are unclear whether they need to be after the concerned PoP to get the payment or whether it will get transferred automatically. Also, what happens if they migrate to some other place? They are worried how the account will be handled,” said Mr Vasa. While these issues can be dealt with, what doesn’t help is the inability of PoPs to explain things clearly. PFRDA is also not very forthcoming when asked about details.

A key differentiator for any investment product is the cost involved. The NPS is a class apart in this aspect. With fund management charges of 0.0009%, it is among the cheapest pension products being offered in the country. But what probably takes away its attractiveness is the high annual account maintenance and transaction charges. For an investor who hopes to put in the minimum contribution of Rs6,000 a year, the Rs350 annual charge is a huge deterrent. However, the government has announced that Rs1,000 will be paid by the government for three years to new entrants. This should take care of the costs for a few years.

This cost structure, coupled with the current EET regime is also a disadvantage for investors joining the scheme at a later stage in their life and enjoying a shorter period of accumulations. The tax incidence at the time of withdrawal will lead to negligible returns for those getting in late in the game. The finance ministry should give this aspect some consideration while deliberating upon the PFRDA’s call for putting the NPS under the EEE system, say investment advisors.

Another turn-off with the NPS is the restriction on withdrawing funds. Under the present rules, for any withdrawals prior to attaining the age of 60, investors are required to invest at least 80% of the accumulated wealth to purchase a life annuity from any IRDA-regulated life insurance company. Only 20% of the wealth may be withdrawn as a lump sum. It also leaves the investor a lot to think about while considering his options about which annuity plan should be bought from, which insurance company and what the returns would be.

There is also a restriction on the age of entry, which is currently capped at 55 years. It essentially leaves out thousands of people aged between 55-70 years of age. Also, the current vesting age, fixed at 60 years, limits the scope of people wishing to get into the scheme at the age of say, 53 or 55.

Finally, NPS also suffers from the fact that other products offer incentives to market intermediaries to sell—whether it is for insurance, mutual funds or any other product. Vivek Rege, another certified financial planner, points out, “The way such products are distributed makes a lot of difference. The distribution network has to be extremely strong. If the distribution network is weak, it will affect the chances of the product. There should be some incentive to distribute it and educate the people.”




7 years ago

The biggest drawback of NPS is not that it doesn't guarantee returns, but that this non-guarantee is combined with zero control/visibility of the system. How do I know where NPS has put my money? Can I control where NPS is putting the money? Who would be running the NPS? Government Babus? What if they are corrupt and are actually doing unethical stuff such as investing into 'friendly' companies at the cost of good companies? Or whether they are frontrunning such a huge fund corpus with their friends/relatives?
Compare NPS with PPF, PPF gives a guaranteed interest rate for a year, so the investor is not worried of his funds. PPF is also not marketed as much, but still people sign up for PPF in large numbers.
Also, what if government decides to appropriate the NPS funds for itself? Like Venezuela recently or Hungary, if government demands that the control be completely turned over to them a few years from now, who will take up the cause of the common man? What if in the name of non-guarantee, I actually get back something that has underperformed even basic national inflation by several percent? Can I complain to anybody?
NPS is a white elephant that is destined to serve only the central govt. employees. It is unlikely to become mainstream for the Private Sector or even Stage govt employees.

Sunil Date

7 years ago

The latest change by IRDA - compulsory insurance in a pension plan, may divert some customers to the NPS.


7 years ago

I am a big critic and non believer in such long term stock market related pension scheme-
to just quote- few years back Japanese NIkke-sensitive benchmark was flying in space at 40000-now it is near near 10000-
just situation can never be dreamed but this is a fact any long term investor must keep to his/her eyes-
why one should go and put his money in locked condition which can give neagative returns at age of retirement-
for availing pension-the best way is reverse mortgage-which will give best returns along with a roof on head-
so better take a loan and pay installments if possible-
the other way is to put small savings in any nifty/sensex benchmark fund which are open ended with no entry/exit load-and are lowest cost-
50% should be invested in such fund which can be liquidated any time when markets looks good-
rest 50% of savings should be put in any bank or corporate FD -
if one does this he makes a far better pension fund then this NPS(non peforming new pension scheme)
so this is far better option then our govt highly advocated pension policy
why to put money in hands of beurocracy who never manage public money with honesty?

Ahmedabad Commodity Exchange gets three months to go national

Apart from demutualisation, the Exchange needs to increase its workforce, replace the existing open outcry system with online screen-based trading and have delivery centres across the country for various commodities

Commodity market regulator Forward Markets Commission (FMC) today said it has given three months' more time to the Kotak Group-promoted Ahmedabad Commodity Exchange (ACE) to convert from a national exchange to a regional bourse, reports PTI.
At present, there are four national level exchanges—MCX, NCDEX, NMCE and ICEX—and 19 regional bourses.
FMC had given one year's time till May 13 this year to the Ahmedabad Commodity Exchange to become a national bourse and for which it was required to set up infrastructure for conducting demutualised trading and raise its net worth to Rs100 crore.
"The commission extended the time limit for ACE by three months till August 13 for completing all necessary formalities required for seeking final recognition as a nationwide multi commodity exchange," FMC member Rajiv Aggarwal told PTI.
Apart from demutualisation, a regional exchange needs to increase its workforce, replace the existing open outcry system with online screen-based trading and have delivery centres across the country for various commodities.
Meanwhile, the regulator has approved the appointment of Dilip Bhatia as chief executive officer (CEO) of ACE, the FMC said on its website.
ACE, which deals in castor seeds futures, had a trading volume of 30 tonnes in the first fortnight of this month.


Liquidity is comfortable, RBI steps pre-emptive: bankers

Liquidity is adequate and the steps announced by the RBI are to provide comfortable availability of cash to banks, SBI’s chief financial officer SS Ranjan said

Bankers do not see too much liquidity pressure in the face of an expected Rs1 lakh-crore cash outgo due to the huge third generation (3G) licence fees and advance tax payment, even as the Reserve Bank of India (RBI) allowed lenders to borrow more funds from it through a new window, reports PTI.

"It is a pre-emptive measure by the central bank to ease any perceived liquidity pressure," State Bank of India (SBI) chief financial officer S S Ranjan told PTI today.

 Liquidity is adequate and the steps announced by the RBI are to provide comfortable availability of cash to the banks, Mr Ranjan said.

Echoing similar view, Bank of Maharashtra (BoM) chairman and managing director Allen C A Pereira said such measures would provide comfort level to the banks. At this point, the banking system is flushed with funds and credit off-take is also low. So, there is no apprehension in the market, he said.

The central bank, had yesterday, opened another window, the second liquidity adjustment facility (SLAF) which will be conducted on a daily basis up to 2 July  2010. The SLAF will be conducted between 4 pm and 4.30 pm.

At present, RBI offers only one such window to banks between 9.30 am and 10.30 am everyday to lend or borrow from it against government securities.

The apex bank manages daily money supply in the system through LAF. If a bank surrenders government securities to borrow from RBI under SLAF, and in the process its holding of such papers come under the stipulated amount, the banks would also not be charged penal interest.

Currently, banks have to hold 25% of its deposits in government securities, gold or cash to meet the stipulated requirement, technically called statutory liquidity ratio (SLR). As such, indirectly banks are given freedom to have SLR at 24.5%, a 0.5 per cent reduction from the present requirement.

The second window may inject over Rs20,000 crore-0.5% of the total bank deposits of about Rs45 lakh crore at present. Most of the banks would be having SLR in between 27%-28%, Mr Pereira said, adding banks already have some headroom even over the current SLR.

Crisil principal economist D K Joshi said the RBI measures are aimed at easing liquidity, although there would not be much pressure on the banks.

"I feel liquidity is quite comfortable, nevertheless the facility would help the banks to tide over temporary problem," Punjab & Sind Bank chairman and managing director G S Vedi said.

However, Bank of Baroda (BoB) executive director R K Bakshi said banks face liquidity pressure on account of the huge 3G spectrum licence fees and advance tax payouts to the government by telecom and other companies.

"Liquidity has really become tight in the last few days. 3G auction taking double the amount than what was expected earlier will put pressure on liquidity...The RBI step will definitely help."

The second LAF window is importance since banks towards the close of the day would know exactly how much is their actual demand for cash after taking money from each other from the call money market.

Currently, the repo rate, which is the short-term lending rate of RBI, is 5.25% and LAF auction takes place at the repo rate.

The fiercely competitive auction of 3G spectrum, which ended last week, offers Rs67,719 crore to the exchequer, almost double of the Rs35,000-crore projected in the budget.

This together with payments for broadband wireless access (BWA) and expected advance tax for the first quarter of this fiscal may result in Rs1 lakh crore outgo from the system.

"The latest assessment of liquidity conditions suggests that there could be temporary liquidity pressures in the market largely due to changes in government balances on account of advance tax payments and 3G auctions," RBI said in statement.

SBI chairman O P Bhatt had also admitted that surplus liquidity is gradually disappearing from the system that has forced it to raise certain segments of short-term corporate loans by 0.25%-0.50%.

However, Mr Bhatt indicated that there would not be general interest rates hike immediately as liquidity is enough despite expected payment for 3G auction and upcoming advance tax.


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