NPS: The system is broken; they are trying to fix it   

September 21, 2010

Pension committee considers changing stipulation of minimum four annual contributions to pension scheme; is also looking at maximising gains for subscribers by reducing the time lag in the investment of funds and reducing record-keeping charges

The New Pension System (NPS), which was thrown open to all citizens 16 months ago, is in the process of being revamped to make it more attractive. A committee appointed to overhaul the structure of NPS is considering giving pension subscribers the option to make the annual payment in one single instalment instead of a minimum of four instalments currently.

"That is something which is under consideration. This was done to give PoPs (point of presence service providers) a revenue model, but we are looking at making it a single contribution so a person can just contribute once," said Rani Nair, executive director, Pension Fund Regulatory and Development Authority (PFRDA). She said that allowing investors to make a single contribution would help generate volumes and this would ultimately benefit the PoPs.

Under the NPS, subscribers are required to make a minimum payment of Rs6,000 annually and the money is to be paid in at least four instalments a year. No instalment can be less than Rs500. There is no upper limit on either the total money that a subscriber can deposit in the scheme or the number of instalments. However, subscribers have to pay a fee of Rs20 to the PoPs each time they make a contribution. Therefore, a minimum of four instalments amounts to a fee of Rs80 every year.

In August, PFRDA set up a committee headed by GN Bajpai, former chairman of the Securities and Exchange Board of India (SEBI), to find out the causes why NPS had received a lukewarm response and to suggest remedial steps required to make it a viable pension system. Mrs Nair said the committee would take a few months to study the matter and submit its report.

The government launched the National Pension Scheme for central government employees joining service from 1 January 2004, but this was extended to all citizens from 1 May 2009. However, the scheme received little response with only about 8,000 subscribers joining in 14 months.

Subscribers have the option of investing their contribution under either of three categories - equity, government securities & corporate bonds and mutual funds. A maximum of 50% of the contribution can be invested in equities and this investment is made only through index funds. These investments are made through seven fund managers who have been designated by PFRDA. Beneficiaries can exit the scheme after reaching the age of 60, but they cannot continue beyond the age of 70.

Other members of the pension committee are Deepak Satwalekar, former managing director of HDFC Standard Life, Abhinandan Jain, IIM Ahmedabad Professor and Nachiket Mor, ICICI Foundation president. Praveen Kumar Tiwari, executive director, PFRDA, is the member secretary of the committee.

The National Securities Depository Ltd (NSDL), which is the record-keeping agency, charges Rs6 per transaction and these charges add up to the cost for subscribers. PFRDA is also in talks with NSDL to try and reduce the record-keeping charges that would significantly bring down the cost of maintaining an NPS account.

Another important issue that has been raised is maximising gains for subscribers by reducing the time lag in the investment of funds of subscribers. Currently, the clearing is done on a T+3 basis, that is the contributions from subscribers is to be invested within three days of the receipt of the money. The maximum prescribed limit for the clearing cycle is one week.

This is quite unlike the process in mutual funds where investors can participate in the market on the same day. In the case of mutual funds, investments are time-stamped and sent to asset management companies (AMCs) before the market closes, so the investor is allotted the NAV of that day. While the physical delivery of the forms can delay the actual investment even in the case of mutual funds, most intermediaries now use a software (called FinNet, launched by CAMS and Karvy Mutual Funds Services) which reduces the time and cost involved in submission of forms.

"As mutual funds are collecting the money and investing it themselves, it's possible to give the net asset value (NAV) of that day. But ours is an unbundled architecture, so it's not possible to invest on the same day," Mrs Nair explained.

An independent financial advisor has suggested that there should be a cut-off time for investment of the money, as is the case with mutual funds. "All contributions must be time-stamped and tracked. This will ensure that neither PoPs nor the record keeping agency can play about with the funds of subscribers, and that the investments would be updated in the account of the subscriber immediately," he said.

An official with a fund manager of the NPS pointed out that there is a penalty for PoPs, if the subscriber's account is not credited within a week. "If it is cash then it should happen on the same day. It depends on the clearing cycle of a city. Normally outstation cheques should not be submitted for subscription," the official said.

Contributions to the NPS are accepted through Allahabad Bank, Axis Bank, Central Bank of India, Citibank, Computer Age Management Services (CAMS), ICICI Bank, IDBI Bank, IL&FS Securities Services, Kotak Mahindra Bank, LIC, Oriental Bank of Commerce, Reliance Capital, State Bank of India, South Indian Bank, Union Bank of India, all of which have been designated as PoPs by PFRDA. — Ravi Samalad