“India is on the cusp of its demographic evolution and will miss out on a wonderful opportunity to put in place the social safety nets which an ageing population will soon demand. We should, therefore, collectively address this important issue so that we can grasp this opportunity before it becomes an insurmountable problem”
- Prime Minister Manmohan Singh during the chief ministers’ conference on pension reforms in January 2007.
Nearly three years after the Prime Minister’s remarks, that opportunity has barely been whiffed, forget being grasped with both hands. The Pension Fund Regulatory Development Authority of India (PFRDA), which was set up in 2003, is still struggling to increase penetration of the new pension scheme (NPS) that was launched in May this year. Some 671 branches of 24 banks and finance companies have managed to draw in just 2,400 subscribers in seven months. That’s a drop in the ocean: the authority hoped to bring a million people into the pension net in the first year. The reasons for the cold response include lack of education and marketing, low fees to intermediaries (which, in turn, means little incentive to market), and the high cost of the scheme for subscribers.
The NPS is the need of the hour in a country which will have 330 million elderly by 2050. Whilst the central and state government pension scheme covers around 6.6 lakh, a large part of the workforce that belongs to the unorganised sector—estimated at 300 million, or 90 per cent of the country’s total workforce—remains out of the pension network. “The response from the unorganised sector has not matched expectations,” says PFRDA Chairman D. Swarup.
So, what exactly is this scheme that promises salvation in the twilight years? Simply, the NPS is a voluntary defined contribution scheme whereby subscribers pay at least Rs 6,000 a year till the age of 60 (See All About the NPS).
The Structural Problem
The NPS subscriber applies through a bank or a finance company, which is the approved point of purchase (PoP). The PoP passes on the details to National Securities Depository Ltd (NSDL), which is the central depository for storing information about the subscriber. The subscription amount goes to one of the six pension fund managers chosen by the subscriber. The POP and NSDL get a transaction-based fee while the pension fund managers get a fee that’s 0.0009 per cent of the funds allocated to them.
If you are wondering why that fee is so low, the answer is that these fund managers were selected by virtue of their ‘lowest expense quotation.’ Result? Since the intermediary’s fee is pre-determined and fixed, there is little incentive to market or spread awareness about the scheme. Says Sandesh Kirkire, CEO, Kotak Mahindra Asset Management Company: “The only financial products in this country that are bought are bank deposits and postal savings. For the NPS to be bought there has to be more awareness and higher tax incentives.”
Even public sector banks, with their extensive branch networks, have done little to promote the scheme. The State Bank of India, the third-largest bank PoP, has garnered only 285 subscribers. Of the 24 designated POPs for the NPS, only 10 have managed to get at least 100 subscribers each—eight of which are private sector entities. Kotak Mahindra Bank, the mid-sized private sector bank, has got 251 subscribers from 25 branches. It has been sending mailers and brochures about the NPS to its customers. K.V.S. Manian, Group Head (Retail Liabilities & Branch Banking), Kotak Mahindra Bank, says the NPS complements its range of products, but there’s not much else his bank can do. “We don’t aim to make money instantly, but beyond a point there is not enough money in it for us to market the scheme out of our pocket,” says Manian. Indeed, the PoP gets Rs 20 for every NPS transaction but is responsible for customer interface— checking on know your customer (KYC) rules, eligibility criteria and so on. And if you go by the 0.0009 per cent fee structure for pension fund managers, managing assets of Rs 1 crore earns just Rs 90! On a Rs 100 crore base, it earns Rs 9,000—not quite enough to spend on making a noise in the market.
UTI Retirement Solutions CEO Balram Bhagat says he will have to mobilise pension assets worth Rs 2 lakh crore to break even. That would call for 33 crore subscribers (assuming each puts in Rs 6,000 annually). “It’s a game of patience and volumes,” says Sundeep Sikka, CEO, Reliance Asset Management, and Director, Reliance Capital Pension Fund Ltd.
Perhaps one problem with the structure is the pricing that is administered by the PFRDA. The CEO of a fund management firm that lost out in its bid to become a pension fund manager says the authority should have instead prescribed a floor and ceiling for the fees, the way the Securities & Exchange Board of India (Sebi) prescribes a ceiling of 2.5 per cent towards total expenses in a fund. The PFRDA, for its part, designed the structure to ensure that distribution, marketing and fund management of the scheme don’t rest in the same hands. What’s more, at the time of bidding, the intermediaries were told that the task of marketing and spreading awareness would be of the PFRDA— an exception of sorts if you consider other regulators like the Reserve Bank and the Insurance Regulatory & Development Authority (IRDA). Neither undertakes marketing activity, although investor education and promotion of the industry (as in IRDA’s case) are very much part of their agenda.
As far as the PFRDA goes, however, intermediaries in the NPS system point out that it has done little on either front. So far, there has been only one nationwide print advertisement since the scheme was launched. Marketmen peg the ad budget of the PFRDA at just Rs 10- Rs 15 crore. Realising this problem, the regulator hopes the government will loosen its purse strings. “We are taking steps to widen the distribution network so that the NPS is easily available to all citizens,” says Swarup of PFRDA, adding that the regulator is working on a media plan to disseminate information about the NPS.
Clearly, there’s plenty of work to be done. Says Mukul G. Asher, a pension policy expert and a professor at Lee Kuan Yew School of Public Policy, National University of Singapore: “The PFRDA must give greater importance to developing the sector, increasing pension literacy and encouraging linkages between micro-finance institutions, NBFCs (non-banking finance companies) and co-operatives.”
The PFRDA could tap into the country’s micro-finance network to get to the grassroots—something that the Life Insurance Corporation (LIC) does. When LIC launched its micro-pension scheme Jeevan Madhur, it took the help of microfinance organisations such as Sri Kshetra Dharmasthala Rural Development Project (SKDRDP) in Karnataka, which runs 13 community welfare programmes, works with over 1 lakh self-help groups and has helped secure bank finance worth Rs 1,600 crore for the rural poor. SKDRDP sold 75,000 Jeevan Madhur policies for LIC but it hasn’t enrolled for the NPS as yet. Says L.H. Manjunath, Executive Director, SKDRDP: “Information, education & communication (IEC) is crucial to help these people understand any financial product. They need to be educated and convinced in their own language about what’s in store for them, is it safe or not, what do they get on retirement.” He goes on to ask, “Will the commercial banks who are already overloaded with work go around to educate about the NPS in this manner?”
Another player in micro-finance is UTI Mutual Fund, which works in association with the Delhi-based Invest India Micro Pension Services (IIMPS). U.K. Sinha, Chairman and MD, UTI Mutual Fund, spent weeks meeting workers of Ahmedabadbased NGO Self-Employed Women’s Association (SEWA) and even milkmen in Bihar to convince them to save Rs 50-100 every month in the UTI Retirement Benefit Scheme, which gives them a lump sum amount on retirement. In little over three years, UTI and IIMPS have roped in 1,25,000 subscribers via various micropension schemes.
Sinha thinks there needs to be sequential intervention in schemes such as the NPS. “In a market like ours, where financial product penetration and literacy levels are low, the policy of no incentives for marketing a financial product will not work. You need government policy intervention in a sequential manner— first bring about awareness and then bring in marketing and distribution,” says Sinha. His team has made several representations to the regulator for a re-look at the current NPS structure. According to him, the cost and policy structure need to be revamped and made self-sustaining by safeguards such as an upper limit on expenses and fees. But Swarup doesn’t think the current model is a hindrance. He is hopeful that once the concept of old age income security is understood, the enrolments will pick up.
Swarup is also banking on a lowcost NPS model for self-help groups (SHGs). It is negotiating with the NSDL to bring down its costs for SHGs, and if that happens these groups could avail of the scheme. But the problem is: Who will convince the SHGs? “The whole approach with the NPS has been from the supplier’s side. A person capable of contributing Rs 50,000 or Rs 50 will not approach a bank simply because the NPS is made available to him,” explains Gautam Bhardwaj, Director, Invest India Economic Foundation.
Even though the fees paid to the intermediaries hardly cover costs, the NPS will remain a high cost proposition for those in the lower income bracket. The current structure is such that those paying Rs 6,000 a year (or Rs 500 a month) end up paying 15 per cent in costs in the first year. For central and state government employees, the total cost is borne by the government, but those in the unorganised sector have to pay.
The NSDL’s charges appear on the higher side—Rs 50 upfront, Rs 10 for every transaction, and Rs 350 as an annual fee. These charges will fall only once the total subscriber base reaches 10 lakh. So, it’s a bit of a chicken-and-egg situation: Costs will come down only if numbers grow; but then the numbers may not grow if the costs don’t come down. NSDL’s MD and CEO Gagan Rai defends the pricing. “This cost was negotiated through an open tender and ours was the lowest. We have a commitment to bring it down once the number grows,” he says.
Meantime, the insurance regulator, the IRDA, didn’t do the NPS any favours when within 10 days of launch, it said insurance companies cannot become PoP agents. What this means is that the PFRDA has bid goodbye to 2,50,000 potential subscribers— that’s the number of agents under the LIC Agents Federation. It could have collected a corpus of Rs 150 crore, assuming each agent makes a minimum subscription of Rs 6,000. The task of the PFRDA Chairman could become easier once the PFRDA Bill is passed and it gets more teeth to devise regulations for its intermediaries. The sooner that bill is passed (and sooner the regulator identifies the problems in its approach) the brighter are the chances of the PM’s dream of a social safety net—with no holes—becoming a reality.