Budget push will boost subscriptions

In an interview with Outlook Money, Hemant G. Contractor, Chairman PFRDA, shares his views on NPS savings post budget and its subscribers. Excerpts: 

The collective increase towards savings under the NPS has gone up post Budget. Do you see this as the trigger for more subscribers joining the NPS?

The very refreshing change in the Budget this year was the additional Rs.50,000 tax deduction exclusive of investments in NPS. Likewise, the increase in deductibles from the earlier Rs.1 lakh to Rs.1.5 lakh under Section 80C is a big boon for those looking to put more money towards their retirement.

At the same time, allowing employees and employers to choose between the EPFO and the NPS will allow a lot of people to choose where their retirement savings contributions should go to. Although it’s not very clear at the moment on how this move from EPFO to NPS will work, but the fact that there is an option will bring in more members into the NPS.

I also expect a lot of things to happen in a positive manner under the Atal Pension Yojana (APY) that was announced in the Budget. This scheme is for workers in the un-organised sector, who are not covered under any statutory social security scheme. It has been proposed that the existing subscribers of NPS-Swavalamban (NPS-S) be automatically migrated to the APY unless they voluntarily opt out.

But, for most people, the EPFO with its assured returns and tax-free-treatment on exit will always seem to be better than the NPS. So, do you still see more people joining the scheme?

You are right, there is no tax parity between the NPS and the EPFO when it comes to maturity. This has always come in the way of people wanting to join the NPS. People do get discouraged with this tax treatment, but I still feel that there will be many who will come into the NPS because of the additional Rs.50, 000 that is available to save on taxes exclusively when investing in the NPS.

Even for the employers there is an advantage as in the case of EPFO, their contribution is capped at a certain level, which is not the case with the NPS. In the case of highly paid employees, the 10 per cent contribution in the NPS is not subject to a ceiling, which could result in a huge amount. Such a tax deduction has been there for employers, but with this option to choose between the EPFO and the NPS, there will be interest among employers and employees to consider NPS over the EPFO for the investment options available with the NPS, which is not the case with the EPFO.

The NPS does not enjoy the EEE (exempt-exempt-exempt) status, which is enjoyed by both the EPF and the PPF. The tax treatment on the maturity of the accumulated sum on retirement being taxed makes the NPS a not-so-favourable retirement product for investors. We have taken this up very strongly with the government to permit EEE status for the NPS as well.

Despite being the lowest cost pension plan, what has held back NPS’ growth?

The prime reason is the lack of awareness about pension. But, there is a visible change with more people joining the NPS.

You also need to consider the fact that the NPS competes with the EPFO, PPF and pension products sold by an insurer. We now also compete with retirement- linked mutual fund schemes, which are back in vogue, so to say. Some of these offer a lot higher incentive to distributors than what the NPS does. However, for a buyer, it makes immense sense to subscribe to the NPS. Once the message is spread, people will understand the importance of NPS and they will start demanding it.

The drive to save for retirement has picked up to some extent. But in the absence of an evolved annuity market, what use is just accumulation?

Yes, you are right on there being little to choose from when it comes to annuities. A lot of insurance products offer annuity, but there is a limitation on what is on offer. We are in touch with insurers and have been discussing with them on this topic. The returns on annuities are very low at the moment, which the insurers say is to do with the risks they take when someone opts for an annuity for life.

Nevertheless, we are hopeful that the market for annuities will pick up; in fact, the NPS is a ready-made product for the annuity business. Under the NPS, on retirement, one has to opt for annuity on at least 60 per cent of the accumulated corpus. We are in talks with insurers and are hopeful that things will start getting better on this front too. Considering insurers will get an assured business from those who are subscribed into the NPS, they should look for better products to offer the subscribers.

We have empanelled about seven life insurance companies, and it is to these companies that we turn to when one of our subscribers retires. Of course, the choice of selecting an insurer to avail annuity rests with the subscriber, we do hand them the products offered by these insurers to consider, as our relation with the subscriber ends as soon as they turn 60.

So, is the overall pension market growing?

The organised sector is well covered, be it with the EPFO in case of private sector, the government and all civil servants. What remains is the unorganised sector, which is not a very easy target to cover. The APY is an excellent move, which I feel will make a lot of difference not just to the scheme, but will also encourage people to invest for the future. A lot of people will be part of the pension cover once as a sizeable portion of the population is not covered by any pension scheme. Only around six crore people have some pension cover, so the potential is huge.

Overall, we have opened about 80 lakh accounts in four variants of the NPS. We have one scheme for central government employees (except armed forces). All Central government employees are members of NPS. We have now over 17 lakh Central government staff covered under the scheme. The second one is for State government employees and we have about 23 lakh employees enrolled. We have been seeing very good growth in this category and they have actually surpassed the number of Central government subscribers. And, 27 out of 29 states have joined NPS with Tripura and West Bengal yet to join. The third variant is Swavalamban, introduced in 2010 for the unorganised sector. Under this category, we have over 35 lakh subscribers with a corpus of Rs.500 crore and lastly, the one open for the private sector.

There is a school of thought that the investment options within the NPS are limited; how and when can one hope for more options to come up in the scheme?

The highest exposure that one can take into equities at the moment is 50 per cent with other options being largely into debt. However, I must tell you that overall, only 15-16 per cent of the subscribers have opted for 50 per cent equity fund option. So, in some ways the preference is still tilted towards debt instruments.

However, that does not mean we do not have plans for new fund options. We regularly review the investment pattern and their performance, and we have plans to consider several other investment options such as REITs and ETFs that may have a higher equity exposure. But, all of this will happen over time.

What is holding back people from joining the NPS, especially those outside the central and state governments?

Issues pertaining to awareness exist. There is not as much familiarity and popularity of the NPS unlike the EPFO or the PPF. We have been driving home the message and I am seeing a change, which is slow at the moment, but I sense after the exclusive deduction provided for to the NPS in this Budget, things will get better.

Moreover, intermediaries have access to other financial products that provide them with better remuneration on sale than the NPS. Once the importance of pension schemes gets instilled, people will start asking for joining the scheme.

I think distributors should be able to sell with a slightly improved compensation structure, but that is all in the works.

This story first appeared in Outlook Money April, 2015 issue.

nk@outlookindia.com