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Monday, May 30, 2016

NPS Changes

 
 


Government employees can henceforth choose from among seven pension fund managers.
 
Government employees who have opted for the National Pension System (NPS) can henceforth choose their own fund manag ers. Till now, government staffers had to choose from three PSU-backed options-- LIC Pension Fund, UTI Retirement Solutions and SBI Pension Fund. The latest move to make the NPS more user-friendly and bring government employees on par with private NPS subscribers will give them access to all seven pension fund managers.These include private sector players HDFC Pension Fund, ICICI Prudential Pension Fund, Kotak Pension Fund and Reliance Capital Pension Fund.
 

However, a number of issues in the scheme remains to be ironed out. To start with, the 15% cap on equity exposure for government NPS subscribers remains. Private sector NPS subscribers, on the other hand, can opt for equity exposure up to a maximum of 50%. It also remains to be seen if the government would consider withdrawing the maximum equity cap of 50% for private subscribers. Many subscribers feel that new employees who are willing to take a higher risk on their portfolio should be allowed to opt for more equity exposure.

 

On the other hand, many EPF subscribers are of the opinion that the compulsory equity exposure of 5-15% imposed on them should be done away with. The argument is that if NPS subscribers are allowed an `ultra safe option' with zero equity exposure, a similar `benefit' should not be denied to EPF subscribers.

 

There is also a need to educate people about the NPS. A recent online survey conducted found that 13.2% of educated Indians were not even aware of the scheme. NPS is the lowest cost pension plan in the world and this low cost structure is its USP. However, the same cost factor is coming in the way of spreading awareness. Since the expense ratio is very low (0.01% the AUM), pension fund managers have not been able to put aside money for increasing awareness.

 

Pension fund managers have also been reporting losses. IDFC Pension Fund Management Company was forced to shut shop and others may also follow suit in coming years. Even if PFRDA allows an increase in expense ratio to 10 bps, NPS will still remain the cheapest pension product.

 

Another hurdle in the path of awareness is the very low commission paid to distributors.For instance, an NPS distributor gets only 25 bps or `20, whichever is higher, for fresh investments. There is no trail commission based on AUM like mutual funds. Here again, there is a need for the PFRDA to consider increasing the commission by maybe a flat 10 bps.

The compulsory annuity clause is another major negative that works against the NPS.

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