'National Pension System is the only genuine pension product'

     Print Edition: December 2012

Pension Fund Regulatory and Development Authority Chairman Yogesh Agarwal talks to Dipak Mondal about plans to popularise NPS.

Q. What does 26 per cent foreign direct investment (FDI) mean for pension fund managers under the National Pension System (NPS)? What is the current order?
A. Even existing pension fund managers can have up to 26 per cent FDI. All that has been provided for in the pension Bill is that the pension sector FDI will move with the insurance sector FDI. Basically, the move is to increase the FDI limit in insurance to 49 per cent, and if that happens, it will automatically happen in the pension sector also. The Bill mentioned that the FDI (level) will be decided by an executive order, but the Standing Committee wanted it to be spelt out in the Bill. It is now spelt out in the Bill that the FDI limit in the pension sector will be the same as in the insurance sector.

Q. Do you think the opposition to FDI in pension will dissuade investors?
A. We have not seen any negative fallout of FDI in sectors where it has been allowed. Already 74 per cent FDI is allowed in the banking sector, and 100 per cent in mutual funds. Have Indian banks or mutual funds been negatively affected in any way? In fact, FDI brings new products and technology, and to that extent it is beneficial.

Q. But will this negative publicity scare away investors from NPS?

'FDI brings
new products and technology, and to that extent it is beneficial'

A. I don't think it will deter investors. They will take a view based on the industry's potential.

Q. It has been three years since NPS was launched. How has it changed over the years? Have these changes made NPS more relevant for investors?
A. NPS for the non-government sector has not been a success. In fact, it has not taken off at all. The entire subscription is Rs 300-400 crore, which is nothing. The basic reason is that there are no incentives for intermediaries. NPS started as a mandatory scheme for government employees. In 2009, it was opened for others. We forgot that there has to be a basic difference between a voluntary and a compulsory scheme. You can't introduce a mandatory scheme to a voluntary sector and expect it to do well. There was no provision for distribution of the product or incentive for selling.

Q. That's when you decided to constitute the Bajpai Committee.
A. When we saw that the scheme was not taking off, we set up a committee headed by former Sebi and LIC chairman G N Bajpai in September 2010. It gave its report in June (last year).

One of the committee's recommendations was to give incentives to intermediaries. The fee being paid to the fund managers, the main intermediaries, was 0.0009 per cent, which was like nil. The fund managers told us that their losses increased with every account they opened, because the fee did not even cover the brokerage charges. Many expressed their desire to close operations if things did not change.

Further, the fund managers were appointed for three years. Who will start a business and invest capital if there is no certainty whether he will be able to continue after three years?

So, on Bajpai Committee's recommendations, we revised the guidelines for fund managers and entrusted them with the responsibility of marketing and distributing the product. For that we increased the fee offered to them to 0.25 per cent. The system of bidding and appointment of fund managers for a fixed period of three years was also done away with.

Q. What was the response of the fund managers?
A. We notified the changes on July 12. These changes were based on discussions with stakeholders. We talked to the fund managers and invited views from the public. Everybody welcomed the changes. The fund managers told us they would now seriously think about pension as a business.

In the US, pension is the biggest business with a corpus of $19 trillion, bigger than the insurance and mutual fund businesses. There is huge scope in India as well.

Q. The Direct Taxes Code (DTC) Bill has proposed EEE (exempt, exempt, exempt) tax treatment to NPS, which will give a big boost to the product. However, the finance minister recently said the new tax code needed a fresh look. Is there a possibility of going back to the EET (exempt, exempt, tax) treatment?
A. No, when the finance minister talks about re-looking at the DTC, I don't think the EEE treatment is on his radar. My guess is that the DTC Bill, in its present form, is very different from the one he had proposed initially. But there is no indication that the EEE treatment will change.

The original DTC Bill said that NPS would be given EEE status. But since it was not implemented, NPS continued with the EET status as the scheme was just launched and there was no withdrawal pressure. So, as far as NPS is considered, it will continue to be EEE.

Q. So, the current EET status is not a deterrent for investors?
A. I don't think anybody is talking about it. It is actually irrelevant as I told you the tax kicks in only when you withdraw and nobody is thinking about withdrawal right now as pension is a 30-40 year product and we are just starting out.

Right now, the emphasis is on investment and accumulation, and both these stages are exempt from tax right now.

Q. The Finance Bill 2011-12 allowed tax deduction up to 10 per cent of basic plus DA on employer's contribution under Section 80CCE and excluded it from the Section 80C limit of Rs 1 lakh. How has been the response of corporate houses to this?

'Many corporate
houses have shown interest in NPS; close to 270 have shifted to it'

A. Many corporate houses have shown interest in NPS and close to 270 have shifted to it. Many more are in talks with us. This exemption in available only on NPS investments and has generated a lot of interest.

What people are saying is that without increasing compensation, companies can help employees benefit from the scheme by restructuring their salaries.

Q. Do you think NPS has a lot of competition? There are insurance pension plans. Even Sebi has been demanding tax exemption for pension plans of mutual funds. How big a challenge mutual fund and insurance companies pose to NPS?
A. The answer to this question was recently given by Irda (Insurance Regulatory and Development Authority) Chairman J Harinarayan. He said that what insurance companies are offering in the name of pension are not pension products. A pension scheme should have two features-one, you cannot withdraw during the accumulation phase, you can withdraw only at the age of 60; second, it should have compulsory annuity provisions.

As far as mutual funds are concerned, they are basically short-term products without any annuity provision. We don't know what Sebi has in mind as far as mutual fund pension products are concerned. Let's wait and see.

Q. But financial planners and advisors tell you to invest in mutual funds for retirement. How can you change their perception?
A. Maybe financial planners need to change their stand. Ask them if mutual funds have the basic features of a pension plan.

The change in perception will come automatically. Basically, it all boils down to marketing and distribution. Earlier, no one was explaining to them, but now that we have allowed the fund managers to market the product, they will tell financial planners that NPS is the only genuine pension product.

Q. Are there plans to increase the number of fund managers and annuity providers?
A. Now the field is open, anybody can apply, subject to the guidelines. There is no restriction on the number of fund managers or annuity providers.

The annuity market is highly concentrated with LIC cornering 85 per cent share. With NPS, it should become more diverse as we are providing them readymade business- we will do all the saving and hand over the corpus to them. Therefore, the number of annuity providers should grow.

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