Latest on New Pension System

Q- Of late, there have been lot of changes in the NPS. Are more changes coming?
A- The PFRDA Act was notified in February this year. Now the regulations have to be framed under the Act. As many as 12 regulations have already been framed. They have been put on the PFRDA website for stakeholders’ views. We have received good suggestions. These would be placed before the Pension Advisory Committee. Based on the PAC’s suggestions and views, it will come back to PFRDA Board for finalisation and the entire process will be completed by December 15 this year.

Q- What is the rationale behind such a low fund-management charge (0.01%)?
A- The mandate of the Act is to ensure minimum cost. The new fee is decided based on a transparent bidding process. So, we expect all the pension fund managers (PFMs), who are part of this system to be able manage funds at the cost which they agreed on. As we go along, there would be some learning as to how this is motivating stakeholders and how it is affecting subscribers’ interest. We would see if the fund managers are able to do their business sustainably and profitably.
Q- So, there is a scope of upward revision of PFMs fee…
A- No, I cannot say that; certainly, not in the current scheme of things. But we will assess the impact of different fees on the viability and profitability of the PFMs business.
The monthly accretion in NPS today is about Rs 2,500 crore. That’s the incremental flow every month but we certainly need to increase it. We are expanding the scope of PFMs to increase the return by deploying the money in newer instruments. We do not want fund managers to involve in marketing of the scheme. We want them to focus on maximising returns.
Q- Who will market the NPS then?
A- PFRDA itself is engaged in marketing and selling the scheme. We have our own strategy and it involves publicity, reaching out to corporate, state governments and the unorganised sector. We are doing so through PoPs and aggregators and also reaching out to the corporates. We have tied up with FICCI and CII for marketing of the scheme to their members. Though the present taxation rule, which is EET (exempt, exempt, tax), is proving to be an issue with corporate sector. Most employees there are tax payers, and as per present rule the gain at times of redemption is taxable at the hand of the beneficiaries.

Q- Earlier, it was proposed that with the implementation Direct Tax Code (DTC), NPS would become an EEE
instrument. What is the status now?
A- The government wants to promote the scheme as this is a defined contribution scheme (wherein an individual contributes himself towards his pension saving) and it saves a lot of money for the government. The defined benefit (where the employer would bear all the cost of employee’s pension) scheme earlier would result in a lot of expense for the government. To that extent, government would not mind losing some money on the fiscal side by making NPS an EEE scheme.

Q- You said PFRDA is expanding the scope of PFMs to increase the yield by deploying the money in newer instruments. What are these new instruments?
A- It’s an ongoing process. We recently allowed PFMs to invest in additional tier 1 bonds issued by banks. We are on the process of allowing them to invest in asset-backed securities and covered bonds. We are also planning to allow them to invest in Real Estate Investment Trusts (REITs) as and when we get more clarity on it.

Money Today’s Dipak Mondal caught up with R V Verma, member, Pension Fund Regulatory and Development Authority (PFRDA), to know the rationale behind recent changes in the National Pension System (NPS).