Retirement planning: NPS needs to be strengthened further

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The recent moves by the Pension Fund Regulatory and Development Authority (PFRDA) to increase the fee structure of pension fund managers (PFM) of the National Pension System (NPS) to incentivise them, thereby attracting more players into the structure, is a welcome move.

The current fee structure of PFMs, as the Chairman of PFRDA Supratim Bandyopadhyay rightly pointed out recently, is pathetically low. Fund managers earn just one basis point as fee, which translates to one paise for every Rs 100 invested by a subscriber. The low fee structure acts as a dampener for PFMs who need to be remunerated properly to enable them to push the NPS seriously and effectively.

However, a greater push to NPS is likely to come if the Points of Presence (PoP) which register and accept contributions from subscribers are remunerated adequately to incentivise them to seek more subscribers.

PoPs are paid Rs 200 for initial subscriber registration and contribution upload and any subsequent transaction gets them barely 0.25% of contribution with a minimum of Rs 20 and maximum Rs 25,000. Also subscriber persistency of six months and Rs 1,000 contribution fetches Rs 50 per annum. The charge structure appears to be inadequate for PoPs to go out actively and spend on garnering more business. This is way below the remuneration paid to intermediaries for marketing life insurance and mutual fund.

Over the years, NPS has emerged as a key pillar in the old age income security landscape in the country and needs to be strengthened to ensure a wide and efficient old age income security net for the citizens at large. Through NPS every citizen can avail of the dedicated avenue to create a large corpus for old age. The scheme offers high flexibility to its subscribers in choosing the investment pattern of their choice. While those young or with ability to take risks can opt for the option that allows the fund manager to invest up to 75% in equities, those with lower risks can opt for investment options where the entire money would be invested in debt, corporate or government. It also provides an option to choose up to 5% of investment into alternative assets.

In the event a subscriber is unable to make a choice, he or she will be put under the auto choice where funds are invested into equity and debt as per their age, where the equity component starts at 75% at a young age and is gradually trimmed as the person grows older. The scheme provides flexibility to switch between investment options and also to between fund managers.

The option to permit a large portion of investments of the subscriber to be channelised into equities provides the possibility of large wealth generation in the long run. As against the 75% allowed in NPS, the EPFO rules permit only a maximum of 15% to be invested in equities. As stock markets hold the potential to generate inflation-beating returns for those who are willing to bear the risks, subscribers who enter the system at a young age can hope to have a large corpus when they are around 60 years and above. Also if one starts investing in NPS at a young age, the long term compounding of the accumulations will act to their benefit.

NPS also provides the advantage of tax savings. Investing in NPS will get you an additional tax deduction for investment up to Rs 50,000 over and above the Rs 1,50,000 deduction permitted under Section 80C of the Income Tax Act.

Little wonder that given its architecture and benefits, inflows into the NPS have been growing. As per reports, at the end of February 2021, the asset under management of NPS and Atal Pension Yojana (a pension scheme for the lower income group also under PFRDA) was Rs 5,59,594 crore, up 33.1% from a year ago. However, this increase could be driven largely by subscribers opting to avail the additional tax benefit and may not be due to the active efforts of PoPs to garner business.

Having adequate funds during old age or post-retirement for those employed is assuming huge importance in the wake of rising life expectancy and rising costs of living due to the inflation and. Also, with nuclear families emerging as the norm and huge mobility of younger population, the dependence on family to provide income security at old age is fast fading. NPS will be playing a pivotal role in spreading the retirement income social security net.