In search of retirement plans

RETIREMENT PLANS

Smita Aggarwal

: It’s not easy to wade through financial jargon, or, at the very least, avoid it. Investment talk has always amused me. Nevertheless, I revere those people who rattle off financial advice at 300-words a minute. When someone remarked that something called a New Pension Scheme (NPS) offers better returns than the mandatory Employees Provident Fund Scheme (EPF), I set out exploring it. The EPFO offers an almost guaranteed 8.5 per cent return. This year, to our surprise, 9.5 per cent. The NPS is said to fetch higher gains in the range of 12-15 per cent a year. Breaking down the jargon to make things understandable, let’s call NPS a “Monster” – which also incidentally reflects my feeling about the task at hand, monstrous. This is not to say that the EPF is any less of a monster. It is, in fact, a bigger one, but everyone seems to have come to terms with it.

What came as some comfort was the discovery that the Monster (the NPS) is barely a year old in the market and isn’t as popular as its makers would have wanted it to be. Monster operates at two levels – Tier I and Tier II. The Central government made it mandatory for all individuals who joined the government on or after January 1, 2004, to be part of Tier I. But others, to whom the NPS was opened up last May, can participate in Tier II in addition to Tier I. In Tier I, the Monster doesn’t allow pre-mature withdrawals, but in Tier II, one can withdraw the amount.

Anybody who is between the age of 18 and 60 can be friends with the Tier I and Tier II version of Monster. As of now, Monster Tier II has just 2,319 subscribers or friends. So, I set out to encounter the Monster at places called Points of Presence (PoP). PoPs are designated financial institutions like banks. There are 35 PoPs in the country at present, chosen by the Pension Fund Regulatory Development Authority (PFRDA) to market its Monster. Further, banks that are PoPs provide this service at 4,527 of their branches across the country. The contribution in the Monster is managed by six Pension Fund Managers (PFM), who based on the option selected by the subscriber, invest in stock markets, government securities and debt instruments in a pre-determined proportion.

For me, finding a bank/financial institution that would facilitate this encounter became a battle of sorts.

Battlefield One: At one of the leading private bank’s busy branch, I was directed to a help desk which dealt with queries on investments and tax savings. The instant I mentioned the Monster, my friendly banker’s face fell. He asked me what my “investment horizon” was. “Which horizon ?” I said to myself, while keeping a straight face. Then it dawned on me. The financial jargon. I told him that the horizon was very limited and I was looking at Monster since I have heard it has good returns. “ No, no. The returns are rather low. Around 9-9.5 per cent only “: he said. “ Oh !” I faked disappointment. “ Why don’t you give me some literature; I will try to study it ,” I insisted. No, my banker wasn’t amused.

“Why don’t you have a look at these two schemes here? They have far better returns,” he said while handing over a photostat copy of two of their popular Unit-linked pension schemes to me. The Monster just lost this battle to a potential customer. Score — Monster: 0, Me: 1

Once back to office, I called a consultant with a leading private consultancy firm who said he won’t invest in Monster because he’s already sinking money into EPF and doesn’t need two funds for one task. Also, he was recently wooed by a mutual fund company and he fell to their charms, he said. Score: Monster: 0, Me: 2

“NPS needs to be sold,” said Amar Pandit, CEO of a consultancy, My Financial Advisor. Blaming the lack of aggressive marketing for failure of the scheme to take off as expected, Pandit said, “NPS is a financial services product where very few people take the lead. In case of life insurance products, one is approached by ten different people. Although low incentive is a reason for lack of sales push by PoPs, Pandit said the product is fairly new, so there is lack of awareness.

Monster’s marketing and distribution received another thumbs down from Mumbai-based financial advisor, Vishal Dhawan, director, Plan Ahead Wealth Advisories. “If you walk into a bank, not necessarily the frontline staff will know the working of an NPS. Training is still an issue,” Dhawan said.

However, PFRDA Chairman Yogesh Agarwal countered charges, stating that it is wrong to blame PoPs for the poor response to the scheme. “The NPS is competing with many other financial products which offer a much higher commission to agents. So obviously the points of presence prefer to push those products,” Agarwal said. He admits though that the product needs to change to cater to the needs of private investors. “The NPS can not depend on what are called ‘pull factors’ but has to become a ‘push product’ so that it can become popular. That is why we have set up a committee under former Sebi chief GN Bajpai to suggest measures to popularise the NPS and review the incentive structure,” he added. Score- Monster: 1, Me: 2

Dhawan pointed out that the cost structure may not be as low as is being made out if the contributions are kept on the lower side. “The fixed cost, in this case, works out to be between Rs 300 and Rs 500 per year for a minimum contribution of Rs 6,000 per year, which is on the higher side. Most of the competing products charge one per cent of costs a year,” he said. It becomes efficient when an individual makes a contribution of Rs 30,000 a year.

Experts seem to be divided on suitability of the scheme for different age groups. Pandit believes the scheme suits people who are between 30-35 years of age, and do not have access to any other pension funds. “There are many self employed, or employed with organisation with less than ten employees where EPF doesn’t provide coverage. It is an option for those who do not have any access for any security as costs are really low,” Pandit added. Dhawan countered: “The most aggressive option in NPS is 50 per cent exposure to equity. For a 25-year old, the risk appetite is much more.”

But when it comes to the performance of this Monster, experts opine that it’s better to wait and watch for three years while the scheme stabalises.

Dhawan strikes caution: “Build your portfolio gradually as everybody is new and there is no sustainable record to go by. It isn’t advisable to put all money into it. There is simply not enough of a track record.”

Even though monster kept losing out on various counts, those are not entirely of its making. As experts point out, its supervisor PFRDA is taking steps to modify it to ensure wider acceptance. There are two factors that work in its favour. One, the product has built in safety features. “With general investing, at every point along the way, they may pull out retirement funds as retirement is not a priority. NPS, however, is a structured program. For investors, that’s a plus,” said Dhawan. Second, in the yet-to-be introduced Direct Tax Code, the contribution, appreciation and withdrawal under the scheme may be eligible for tax exemption.

Monster:2, Me:2

Even though, I failed to sign up for the Monster in round one, it does not seem be a bad idea to befriend it!

Smita Aggarwal @expressindia.com
Source:Financial Express