Implementation is now the key

Most of the key pieces of NPS are in place. But this is only the first important step. Its not the outcome. All the real challenges are before us building a distribution model that works,balancing commercial incentives and costs,delivering high real returns,and rapid nationwide coverage. This will require energy and innovation,and effective management and monitoring of implementation .

amp;149;Do we require two NPS,or should they be clubbed?

The informal sector NPS is the real version. The civil service NPS model,on the other hand,was perhaps a response to pressure from the Left parties. Once the informal sector NPS has become stable,we should graduate to a single system where informal sector workers and civil servants enjoy identical product choices,rights,and opportunities to maximise their retirement savings.

amp;149;Do you think the Rs 6,000 minimum investment per year is high for the population in the lower strata?

Our household surveys show significant demand for retirement products at the lower end of income distribution. An annual minimum contribution of Rs 6,000 is too high for the 140 million people who earn Rs 3,000 or less per month. If this is retained,it will cause NPS to bypass a large population that should be of interest both from a public policy and pension inclusion point of view. But I expect the Pension Fund Regulatory and Development Authority PFRDA will lower the bar and go down the income distribution ladder once the plumbing starts working well.

amp;149;Do you think fee for fund managers is too low?

At 0.09 basis points bps,NPS probably offers the lowest asset management fee in the world. This is excellent since low asset management fees are good for customers. But we cannot expect commercial firms to carry the load of public policy goals on their backs. Hence,to succeed NPS will need to be based on sound commercial principles.

The present fund management fees would perhaps make sense if NPS already had huge assets under management AUM. Instead,we are starting from zero assets in a system where voluntary coverage and AUM could take several years to gather significant momentum. Also,unlike the CRA Central Record-keeping Agency and POPs points of presence,only fund managers are required to set up new companies.

With high start-up costs,near zero fees and zero AUMs,none of the six fund managers will make any sensible revenues within the tenure of their contracts with PFRDA. It may be useful for PFRDA to increase the pension fund mangers PFMs contract tenure to 10 years,review their fees in comparison to the fees for CRA and POPs,and also permit them to manage excluded provident funds and other retirement and superannuation schemes. After all,returns delivered by NPS will be the single most important driver of growth. And PFMs,therefore,are one of the most critical players in the system.

amp;149;If returns are so important,why is there a cap on investment in equities,especially since these are long-term investments?

The pure schemes recommended by the Deepak Parekh Committee are a good idea. But Im really more concerned with the design of the default option since I expect most people to actively select the default. I believe the current version of the default or auto choice should rebalance the portfolio every year even before the 35-year age limit. The default is also perfect to counter the volatility risk caused by inertia or ignorance.

amp;149;After the accumulation phase,people will have to buy annuities from life insurance companies. Do you think this will create confusion since the two entities have different regulators?

I dont believe this will cause any confusion. Even now,NPS service providers report to multiple regulators. But I do worry about the cost of annuities. Today annuities are priced assuming a life expectancy of 85-90 years. NPS ,on the other hand,is more targeted at lower-income informal sector workers who cannot afford or access regulated retirement savings options. I expect the life expectancy of a typical NPS member to be more modest than the mortality assumptions made by life insurers. Under the present annuity pricing approach,low-income workers would end up subsidising higher-income workers and civil servants under NPS.

Unless the life insurance industry gets its annuity pricing right,PFRDA should not force NPS members towards annuities. It should offer an option for systematic withdrawals at 60. Perhaps PFRDA and IRDA should jointly think through the exit options.

amp;149;What other changes do you think need to be made?

We seem to have too many different systems that deliver inefficient retirement outcomes. I would like the new government to step forward with an equitable and inclusive pension policy for India. Everyone,regardless of their incomes or where they are working,should have the same opportunities to maximise their savings for old age.

Also,once NPS gets larger coverage,it will become essential for us to ensure portability across pension systems,say from EPFO to NPS.