WHY NPS SHOULD BE OPPOSED IN GOVERNMENT SECTOR
WHY NPS SHOULD BE OPPOSED IN GOVERNMENT SECTOR
PART – 4
The scheme is available across the country but only in theory.
Walk into a bank for opening an NPS account and chances are you will walk out with an insurance policy or a pension plan from an insurer. At a post office, you will have to explain the whole NPS concept to the entire hierarchy from the humble clerk to the postmaster before they tell you it can’t be done. This is the tragedy of one of the most investor-friendly investment schemes launched in India. Even though it is theoretically available at thousands of locations across India, the scheme has not been sold and marketed very actively.
Nobody wants to sell the NPS because of the low commission it offers. A bank that sells the NPS will make a puerile Rs 100 on the transaction. Any further transaction will earn Rs 20 or 0.25%. If it sells a traditional insurance plan to the investor, it would pocket 30-35% commission in the first year alone. Is there any doubt on what will get sold more at the bank?
It’s a chicken and egg situation for pension fund managers. They can’t spend on distribution and spreading awareness because they can’t charge more from investors. Last year, the Pension Fund Regulatory and Development Authority had raised the annual fund management charge from 0.0009% to 0.25%. Two new pension fund managers had joined NPS on hopes that the hike in charges would make the business viable. But this year, the PFRDA went back and invited fresh bids from the pension funds managers. Reliance Pension Fund has emerged as the lowest bidder at 0.01%, which others will have to match. The low charges mean the scheme will continue to be not sold.
Lump-sum withdrawal and pension are both taxable.
withdrawn as lump sum on maturity compared to 33% by an ordinary pension plan. That’s a plus point but the big negative is that this commuted sum is taxable. “Making the lump sum withdrawal and pension tax-free may not make a marked difference in the popularity of the NPS,” says Sudhir Kaushik, co-founder and CFO, Taxspanner.com.
Besides, the rest will be put into an annuity for pension income. One sore point with potential investors in NPS, particularly in the highest tax bracket, is that the pension from annuity is fully taxable as income. If they put the same amount in a debt fund and started a systematic withdrawal plan for monthly income, the tax would be significantly lower from the second year onwards when the capital gains are treated as long-term. In times of high inflation, this can be as low as 2-3% compared to the 30.9% they have to shell out.
“I don’t recommend NPS to clients because there are several other products offering taxfree income such as PPF, ELSS or equity funds,” says Amit Kukreja, founder of financial planning firm WealthBeing Advisors.
No limits on investments and investors can switch once a year.
Whatever be its other shortcomings in terms of taxability and returns, the NPS does offer tremendous flexibility. For one, there is no ceiling on the investment as in case of PPF. The investor can also change her pension fund manager if she is not satisfied with the performance. This won’t be possible if she invested in a pension plan from an insurer or in a mutual fund.
In a unit-linked plan she can shift from debt to equity and vice-versa but cannot change from one insurer to another. Likewise, she can switch from one mutual fund to another but the transaction will be treated as a redemption followed by a fresh investment. In NPS, the money will seamlessly shift from one pension fund to another pension fund.
On the flip side, she can do this only once in a financial year compared to unlimited times in a Ulip or a mutual fund. Financial planner Kukreja says even one switch in a year is sufficient. “Even one switch a year can do wonders,” he says. Another feature is the tier II account for those who already have a tier I account. These accounts have no lock-in and investments can be redeemed anytime.
The sore point is that the NPS funds cannot be redeemed before you turn 60. But that can also be seen as a plus, especially if the investor is spendthrift by nature.
They are low but not if you include the cost of index funds.
The NPS has been touted as one of the cheapest financial products in the world. However, the low fund management charges of the pension funds do not take into account the expense ratio of the index funds and other mutual fund schemes in their portfolio. The E class equity funds are supposed to invest in Nifty stocks in the same proportion as their weightage in the index.
Pension fund managers do this by investing in index funds that track the Nifty. But the expense ratio paid on these funds is conveniently ignored. “This is a complete fraud on investors. The costs of the index funds in the portfolio should also be factored in,” says Dhirendra Kumar, CEO of Value Research.
The other problem is that there are fixed costs for every transaction in the NPS account. This is 0.25% of the investment or Rs 20, whichever is higher, with a ceiling of Rs 2,500. This discourages SIP investments. A person investing Rs 1,000-2,000 a month will end up paying a 1-2% entry load on every instalment.
The veil of secrecy around the NPS inhibits investor interest in the scheme.
Last year in May, in a significant departure from the past, the PFRDA issued a press release tom-toming the spectacular returns earned by the various NPS funds in 2012-13. Don’t expect one this year as well, because there’s nothing great to write about. Yes, equity schemes zoomed 20-22% in 2013-14, but the gilt funds churned out extremely poor returns of 2-3%.
Even if investors want to put money in NPS, they are not sure which fund should they opt for. The veil of secrecy over the NPS returns is inhibiting. The media is also to blame. Coverage of the NPS focuses on features and new rules. Performance is rarely tracked.
However, some pension fund managers have taken steps to educate investors and disseminate information. The website of ICICI Prudential pension Fund, in particular, provides useful tools that help investors get a perspective of their funds’ performance. Incidentally, all the funds managed by the ICICI Prudential Pension Fund have been top performers in their respective categories in the past 1, 3 and 5 years. On the other hand, the portfolio disclosure page of the LIC Pension Fund has been “under construction” for over a year.
The complicated structure of the NPS keeps investors away.
If opening an NPS account is difficult for the average investor, managing one is even more so. As if the multiple procedures required are not enough, there are also multiple fund choices before the investor. Indians don’t score very high on financial literacy, so comprehending a sophisticated scheme like the NPS is beyond a large section of the investing population.
The good news is the auto choice offered as the default option by the scheme. If you have not mentioned your asset allocation or simply don’t know where to invest, your money will flow into the life cycle fund. Under this, the investor’s age decides the equity exposure. The 50% allocation to equities is reduced every year by 2% after the investor turns 35 till it becomes 10%.
In one sense, the life cycle fund is a godsend for the newbie investor. It is the only genuine asset allocation fund in the country that is customised to the individual’s situation. No other product offers such a facility. The rebalancing happens once a year on the birthday of the investor.
Even so, the NPS is a complex beast that very few understand and even fewer invest in. Sebi has proposed that mutual fund house should launch pension plans. No doubt, such schemes will be far more easy to understand than the NPS in its present form. “The complicated structure of the NPS is an inhibiting factor for many investors,” says Jayant Pai, head of marketing, PPFAS Mutual Fund. Perhaps this is why the scheme has not even attracted 1% of the investors it had targeted five years ago.