The National Pension Scheme (NPS), structured to be the Indian market’s primary retirement resource, is lagging behind in market share, either due to structural issues, or lack of marketing push. However, there is no doubt on the long-term necessity and durability of NPS as a product (it must be mentioned that NPS allows for extremely low marketing costs, making it not as attractive as marketing other investment opportunities like mutual funds or equities).
Pranav Mishra, Senior General Manager in Retail Liabilities at ICICI Bank, discusses the product requirement at the macro level, right down to its strategic importance to sector players in a discussion with Narayanan and R N Bhaskar with editorial inputs from Mona Joshi. Edited Excerpts:
How do you – being a banker and a distributor – approach the pension funds industry? How vital is the NPS as a product?
Distributors or aggregators have to make a conscious choice – whether to be fee centric or customer-centric. The customer now prefers to learn on his own rather than get a curated view. Content is valued, but neutrality is valued more. Our view is that as ecosystems evolve, customer alignment is needed.
Bankers have to evaluate—whether they want to be just another (player) among the distributors, or they want to create a customer franchise. Bankers have a relationship with customers across the spectrum — in assets as well as liabilities — so this question is important. The distributor has to narrow its focus on what product gives best returns for his client—mutual funds, insurance, pension funds. Then comes the question of charges, and net yield to the customer, which is the key. In that context, we see that the National Pension Scheme (NPS) is the best in terms of charges and it becomes a key candidate.
Overall, you must understand that NPS has not been marketed much, beyond a tax-planning option. The importance of the NPS to India comes from the current financial planning structure of the country. Indians traditionally are used to planning retirement based on their savings, but that changed in the 1995-2005 period when people started putting savings to work and expecting some returns. Beyond that, at the macro-economic level, there was a shift in mindset. Savings started getting utilised for consumption. Today, we have a scenario where people are leveraging savings for consumption rather than for assets.
Given this, in another ten years’ time, the scenario would be dangerous unless proper pension planning is done. We would have a distorted pyramid—whom will the retired class depend on (at a later stage in life)? So as an industry, we recognise that our customer has to be made future-ready. As a company, we take a step further and say that, for that purpose, we are ready to sacrifice short term gains and build a relationship which customers will value, in terms of brand and faith. NPS is such a product which will enable this.
Another aspect of this market is its growth potential. Affluence is growing, so there will be momentum. As per a BCG study, 8 per cent of Indian households today have annual income of 10 lakh or more. That is 8 per cent of 30 crore households. And this figure is expected to go to 16 per cent in just five years.
This again is a trigger for the industry, for people like us to be future-ready. First, consider the impact. This 16 per cent segment is expected to contribute 40 per cent of the GDP through consumption. Pension obviously will be one of the ecosystems here. So this will be a tipping point in terms of both scale and momentum. Secondly, affluence means rising security needs, especially financial in nature and focused on the future. This is what is coming up.
How does the bank approach its distribution business?
Let us understand how we conduct our distribution activities. It is mainly through three approach channels — households, corporates and lastly individuals through our online channels. Corporates understand that what NPS offers would be more efficient than their present superannuation planning. The employer and employee benefits are quite apparent. For our acquisition team, it represents acquisition of customers in bulk scale.
Households again, like corporates, is a B2B2C acquisition approach. We would approach a society, or a school body. Typically we find that in societies 60 per cent are salaried and the rest self-employed. For retail you would be interested to know that we are at present the only bank to have launched a specific product — NPS for savings. The account is linked to the bank account, NPS contributions get deducted automatically and amount of contribution is entirely their option. Onboarding is totally digital, which suits a population which is more and more into DIY.
Age-group wise we see millennials largely as DIY types, especially in finance and this is a learning for us. We have seen this tendency translate into more client inquisitiveness and comparison of mutual fund schemes with the NPS. All this would also impact the weightage of selection of avenues into which to put the funds. We have already seen a dimension change in insurance over the past decade. Recognising such trends is more vital, when you consider that most of our conversations to enable his decisions are also going to be online. This is a vital consideration in an industry where margins will inevitably shrink.
We are confident that NPS is an enduring product.
How does your target market look at the NPS as a product?
The NPS specifically is still being marketed as a tax instrument, so there is a great need of increasing awareness.
If you look at the market size of varied products, the mutual fund AUM is around Rs 25 lakh crore, wherein retail component would be Rs 4-5 lakh crore; and insurance industry would have an AUM figure of Rs 10-15 lakh crore. Against that, the comparable NPS figure is just Rs 4 lakh crore, wherein about 90 per cent contribution is the government sector and 10 per cent is the non-government sector. That gives you a complete idea of the skewed priorities and awareness levels of the domestic savings and investment market.
Now, we look at the typical mindset in building retirement assets. Assets have to offer safety, liquidity and returns. Indians by and large are fixated more on liquidity. This psychological need of access to money, which you can see in the growth of SIPs, is actually impeding wealth creation. This thinking is a bottleneck to pension products - you can easily break an SIP but not a pension scheme.
Since the 60 per cent clause was introduced (which allows the customer to withdraw 60 per cent of the funds post maturity), the incremental accretion has been 3x, which again tells you of the fondness for rapid access to money.
How do you plan to accelerate growth in the product like NPS where seller commissions are thin?
We understand that sustainable growth is not by rising distribution fees but rather by growth of corpus size. Today, while the average monthly NPS accretion is Rs 4,500-5,000 crore, it is mostly from the government sector. The agent on the ground can look at corporates, who would surely want a better alternative to their current superannuation plans, and understand the opportunity.
Another aspect to consider is that onboarding has to get smoother and therefore move online more and more. Intermediation will anyways reduce as more DIYers get into the stream. Online processing, including CRA change will improve viability and catalyse decongestion.
Agents would need to understand our perspective – the bank wants customers to look at us for multiple solutions. Banks would generally be happy on the float that gets generated when savings and NPS accounts are linked. Banks anyway are focusing on the customer in totality—his lifestyle and life stage.
Book building is the bigger objective. We are not prescribing targets to agents, but we are clear on the quality of customer acquisition. More primariness is needed.