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Saturday, August 25, 2012

No other pension product comes as cheap as NPS

With new norms in place, the National Pension Scheme (NPS) scores high on the affordability scale. If all goes as hoped, customers of this scheme will be charged not more than 0.2% per year. Yogesh Agarwal, chairman, Pension Fund Regulatory and Development Authority (PFRDA), in an interview with Aswathy Varughese opens up on challenges and opportunities in the NPS.
Will the NPS be available through mutual fund companies?
As far as the NPS is concerned, insurance or mutual funds companies have no role to play in its distribution or marketing. Insurance companies can be the annuity providers once the person reaches the retirement age. During the accumulation phase, there are no roles left for insurers or mutual fund houses.
Do you think the marketing strategy of the NPS went wrong and it was precisely the reason why it did not take off as expected?
For government employees, it was a mandatory scheme. As far as private sector is concerned, we forgot that it is a voluntary system and we need to push the product. We extended this scheme to private sector thinking that it will take off by its own. Unfortunately, that has not happened and that is precisely why we have relaxed the registration norms for pension fund managers (PFMs). The NPS was not a viable proposition as nobody was marketing it. With the relaxed norms in place, we believe that it will reach out to more people.
How will the relaxation of norms for PFMs help the NPS take off?
Private pension fund managers can support this system by boosting the marketing and distribution of the NPS. Till now, the marketing was completely missing. Now with the new regulations, PFMs will be in a position to choose the distribution network and prescribe the charges. This will allow them to run an economically viable business model subject to an overall cap prescribed us.
Do you think the NPS will become a costly product after changing the charges?
Even if pension managers are free to quote their charges, it’s subject to the overall cap, say, 0.25% or 0.3%. In terms of overall cost estimate we have, per year for customers including all charges, it will not be more than 0.2%. No other financial services industry which is involved in the pension space is giving such a cheap product.
What was the rationale behind restructuring the charge structure?
The rationale behind the revised guidelines is to incentivise the marketing of the product which is beautifully designed to meet the retirement needs of the individual. The revised guidelines specify the role of the PFM in marketing and distribution of this product. They have been given the freedom to choose their distribution network and viable business model. The overall cap on the charges that will be prescribed by the PFM will be soon announced by the government committee. But will not be more than 0.25% per year which still makes the NPS a low-cost product for customers.
What is your take on annuity markets?
Life insurers should turn up as annuity providers of this pension scheme. The terms and conditions for offering annuities for pensioners covered under the scheme are available on our website. But the unfortunate part of the annuity market in the county is 85% of the market is occupied by Life Insurance Corporation (LIC), 10% by SBI life and only remaining 5% is covered by other life insurers.
The NPS system mandates that a minimum 40% corpus has to be utilised for purchasing annuity from one of the six life insurers which were empanelled by the Pension Fund Regulatory and Development Authority (PFRDA). The remaining 60%of the corpus accumulated can be withdrawn.
LIC, SBI Life Insurance, ICICI Prudential Life Insurance, Bajaj Allianz Life Insurance, Star Union Dai-ichi Life Insurance and Reliance Life Insurance are the six annuity providers empanelled by the pension regulator. Going ahead, we expect more life insurers will come forward as annuity providers which will be a positive thing as far as annuity market is concerned.
What will be the changes once the PFRDA bill is passed?
We already have the power what we need. The bill when passed will give us statutory power. This means that if today we have to excise the regulatory power and penalise the player, we have to approach a civil court for that.
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