Pensions, too, must be sold

NPS flounders for want of marketing.

The new pension system (NPS) for private citizens generated a return of 12% last fiscal year. This is higher than what the Employees’ Provident Fund has achieved, and higher than what fixed deposits of banks yield.

However, it is significantly lower than what could have been achieved in a year in which stock indices doubled. It transpires that the NPS started investing in equity only a little late in the year and secured a modest 26% returns on equity investments.

One has to wait for a full cycle to get a clear picture of how the NPS performs. However, the most striking feature of the NPS’ first year of performance after it opened up to voluntary contributions is that the corpus of such contributions amount to a meagre Rs 10 crore.

This is remarkable under-achievement for a well-structured, well-regulated scheme with an asset management charge as low as 0.0009%. Of course, there is a disincentive in the form of discriminatory tax treatment of the NPS, as compared to savings schemes like the Public Provident Fund (PPF).

Withdrawals from the NPS are taxed, while those from the PPF are tax-exempt. The promised harmonisation of the tax treatment of all long-term savings schemes is yet to materialise.

But the NPS is floundering essentially because of a faulty marketing model. A course-correction is imperative for the scheme to succeed. The government now contributes Rs 1,000 to the pension account of every new NPS subscriber.

It will cover the cost of starting an account with the central record-keeping agency and of carrying out transactions, and give a positive return on the very day of joining the NPS.

But this incentive to the subscriber does little to spread awareness of the scheme, to market the scheme. And the biggest problem with the NPS is that it is relatively unknown.

With a wafer-thin asset management fee, fund managers can hardly afford to market the scheme using their money. The pensions regulator PFRDA does some publicity for the scheme, but this is not enough.

The government must offer distributors, the so-called points of presence — banks that open NPS accounts for subscribers — and others, reasonable incentives for roping in subscribers.