How to get investors interested in National Pension Scheme

　


The pension scheme can be critical in ensuring old age security for millions in the country. Uma Shashikant lists out how to achieve this objective.
The Pension Fund Regulatory and Development Authority (PFRDA) is now a statutory authority empowered to develop and regulate the market for pension funds. The National Pension Scheme (NPS), which was launched in 2004 and extended to the general public in 2009, was the first product launched by the PFRDA. The scheme aims to ensure old age security for millions of Indians. What are the critical tasks to achieve this objective?

The first task it to ensure a simple definition of the product. NPS moves from the traditional idea of defined benefit to defined contribution. The investor's corpus and income are determined by the market value of the investments made. If the product has to be accepted by the public that has been used to defined benefits so far, there are only two ways to win confidence. The first is the investment process and the second is the product performance. The PFRDA should stop tinkering with the processes as it has done in the past. NPS portfolios should remain passive indexed portfolios investing in multiple asset classes. Investors should have the choice of standard portfolios from which they can choose, with a default life-stage option that modifies the allocation as a person ages. NPS can and must offer standard portfolios that are retirement solutions for the long run. Period.

The second task is to make the NPS as attractive as possible. Compulsory annuity, tax treatment of income and difficulty in rebalancing the portfolio are all dampeners to a discerning long-term investor. If the PFRDA wants to be seen as the largest holder of long-term savings, it needs to build the power that such a position holds and negotiate all that is needed to deliver its mandate.

The third task is to position the product as a core, default choice to investors. The greater the choice, the higher is the confusion and fear of choosing a wrong product. This is why index funds make so much sense. There is no fear of choosing the wrong fund or the wrong manager. There are always funds that outperform the index . But there is no way that an investor or advisor will always select that winning fund, before its winning performance is known. Between the reality of funds outperforming the index, and the practical ability to participate in that outperformance, there is the devil of fund selection. Choosing an active fund manager among the competing managers in NPS will only lead to higher confusion. The managers would deliver out-performance, except that different managers will do well at different times and no one will know how and when to choose the right fund. NPS should be a pure, passive, asset allocation strategy that works by default. It is easier to build a product to size when this is achieved. Active management can come much later.

The fourth task is to acknowledge that even the best product needs distribution. If the NPS does not spawn too many product variants--a dangerous path it seems keen to take--distribution is an easy task. There is an army of lowcost , low-value and low-skilled distribution force in this country, willing to sell if there is money. Then there are advisers, the more informed category of sellers, who look for a core income that can keep them afloat while they negotiate the market for fees. NPS has the ability to position itself as a steady revenue earning and honest product that everyone is keen to sell. With volumes, the commissions can come down, but without it, NPS will remain a good product no one knows about. Distributors will be the most efficient educators of a product, if they see the incentive to talk about it.

The fifth task is to deglamourise the fund management function until size is achieved. A passive index portfolio with a standard proportion across assets, can be delivered easily and at low cost. Investors can select the manager they like, who can deploy funds according to the model portfolio, for a small fee. What the PFRDA will need is a high quality investment advisory committee, which will manage the model port folios. This committee may be able to select actively managed funds, which can be later in cluded in the model portfolio. Over time, asset managers will clamour for inclusion of their well-managed products into the model portfolio Tinkering with fees and portfolios and shifting from passive to active were all done by the PFR DA because they tried to get low-cost managers to manage tiny portfolios that could not repli cate the index. Passive first, active later.

The sixth task is to ensure widespread aware ness about the need for a secure retirement. The changing social structures require the elderly to fund their own retirement, even as they stare at higher life expectancy. The risk of investing in equity in the earning years might be so much smaller than the risk of an impoverished retirement. PFRDA needs a large-scale buzz about NPS. That will come when the regulator drives conversations about its products through a large army of distributors, advisers and investors who see a simple, tax-friendly and useful long term product.


Source: The Times of India