What is the role of the National Pension System?
The National Pension System came into being in 2004. It was set up to provide a vehicle that would facilitate fund accumulation for old age security to employees, both in the Government and in corporates and those in the unorganized sector.
This program was conceived by the Government to move out of the defined benefit environment and into a defined contribution approach. This major reform was carried out in 2004. It is estimated that by this move, by 2035, the liability of pension on the government budget would be eliminated.
The NPS Trust is a body with its own revenues and resource mobilization. It has three major functions.
One, it provides substantial oversight on fund managers and fund management. This oversight is largely on whether they comply with provisions of the PFRDA regulations on investments.
Two, provide complete oversight on all other intermediaries – central record keeping agency, points of presence, aggregators, pension fund advisors. And third, create awareness and promote NPS within the system.
Has the fund management under the NPS become robust, challenging or both?
It has become far more robust because of the extent of the oversight. Let’s look at a comparable environment like mutual funds. These funds are essentially self-regulated to some extent and investors in these vehicles make highly informed choices.
The assumption being made is that investors are well aware of the market, risks, what exactly they are putting their money into.
Look at similar products from life insurers. Costs that are loaded on both the accumulated amounts and the annuity payouts are substantially different than the NPS.
In our case, we start with the assumption the subscribers may not be able to assess investment performance. Hence, a lot of people, particularly those at the grass root environment, are assisted in making choices from between established products.
The Trust is almost like the trustee. Emphasis is on regular performance and that the subscribers’ funds are well protected.
Another major highlight of the NPS funds is the cost at which this entire service is being rendered. For instance, with total assets under management of about Rs. 3.80 lakh crore today, the total cost this year of the PFRDA / NPS Trust including cost of all intermediaries, record keeping, and others, is just 8 basis points! I am sure this must be among the best performances globally.
I can say that the pension reform objective of low cost, high service orientation program has been achieved with the NPS.
The NPS offers low cost solutions. However, participation in the NPS is largely from the Government employees. How are sellers being incentivized?
Yes. About 80-82% of subscribers are government employees and almost 90% of assets under management are contributed by them.
Incentives is one of the major challenges we have been facing right from the beginning. Maybe that is the reason, I think, the policy makers thought it wise to introduce it to government employees first. Then there is no accumulation cost. It is mandatory (from Jan 1, 2004).
Why is the private sector not flocking in to avail the benefits of this scheme?
Volatility changes the investment behavior of individuals. People tend to invest in short term funds. In such cases, market risks, churning and transaction costs have a much larger impact on the accumulated amount. It is the behavioral aspects at play here.
Pension funds have to be treated far more seriously. If you want the person to live with pride, and not be dependent on the system for his pension, then the only way out is to have a very strict regime of pension system.
Which is well supervised and regulated and constantly educating the person about his choices. And discourage a person from withdrawing from the accumulated funds too often.
Do you see the PF getting merged with the NPS in due course?
I believe the Government is looking at this seriously. In fact, the idea of a unified pension platform was mooted in the last budget. To my mind, that is the way to go.
A unified pension program would be run far more efficiently and at much less cost. Overlaps and unnecessary overheads are reduced. The coverage could be much wider as well.
How is it assured that there is enough money to meet the obligations of assured return schemes, particularly assured return pension schemes?
This is a radical shift in thinking that is required. So called guaranteed returns have to go. It comes with either a huge cost, or with a huge amount of capital that has to be set aside.
Liabilities to service assured return products comes on life insurers that have offered such products. However, many life insurers do not disclose all finances to assure whether such promises could be met 30-40 years later. It needs transparency and regular posting of finances. The same goes with pensions.
Does the NPS give a statement that there is the amount of money available to meet its future obligations?
In case of the NPS, there is no assurance needed. The amount in the subscribers’ account is disclosed to him on a daily basis!
In the case of Unit 64, the underlying value and the NAV declared were totally different. In the NPS, not only is the NAV disclosed regularly and on a transparent basis, there are assets available with fund managers whose value is no less than what is disclosed and that too on a dynamic basis.
This regime is totally transparent. In case of assured return products, like Atal Pension Yojana, the Government needs to set aside the liabilities from the central pool so that pension funds are not eroded.
Such a separate fund has to be kept aside every year and given to proper fund managers. In some form or the other, the Government is doing this already.
A radical government should create proper funded programmes. This would ensure transparency in the system, the middlemen not grabbing away some of the benefits, and that a proper old age security is in place.
What is that one key thing that you think the Government still has to do?
Today, each organization, such as the EPFO, PFRDA, runs its own awareness programs. Communication of new products, regulations, change in design, etc, could be the responsibility of such agencies.
The Government should take up the responsibility of awareness creation. I think the Government should run “nudge” programs – nudge people to make informed choices rather than go for default options.
In the scenario where interest rates are declining, what is your vision for the pension system?
n I think interest rates are cyclical. In the cyclical environment, markets will keep on going up and down. Particularly the debt market. In such a scenario, it is difficult to maintain a long term view.
You are tempted to take short term benefits. It would be a radical mistake to predict that inflation numbers may continue to be where they are.
For old age security, you want long term vision, a long term programme. And long term laws and regulations associated with that.