New Pension Scheme

Much like Neil Armstrong heralded a new era of vigor and adventure into space travel with his moon mission and immortal words ‘That's one small step for man, one giant leap for mankind', PFRDA has set into motion a process of significant investment implications.

The Pension Fund Regulatory Development Authority of India (PFRDA) is the regulator for one of India's most important financial products - the Pension Fund, through the New Pension Scheme (NPS). With no safety net for the unorganized, and the terrible service standards that those investing through EPFO endure, this is indeed a breath of fresh air.

By announcing that April 1, 2009 would be Day 1 of business for NPS in its expanded form, the regulator has finally opened long term financial planning for the Aam Aadmi.

What makes Pension Funds worth rooting for :

• It is truly long term : Investors can plan their retirement with investments in the new Pension Fund. That's a clear 30-40 year time horizon for new entrants.
• It is well structured : PFRDA has appointed 6 Pension Fund Managers (PFM), a Central Record keeping Agency (CRA) and Points of Presence (PoP - basically distributors). The CRA acts as the interface between PoPs, PFMs, Banks etc.
• It is extremely low cost : Pension Fund Managers have been appointed at the lowest cost (less than 0.010% per annum as management fee). This is MUCH LESS than what Mutual Funds charge for managing even liquid funds and a small fraction of what insurance companies charge. NSDL, the CRA for the NPS, would charge Rs. 280 as annual maintenance fee per subscriber and Rs. 6 for every transaction. This is amazing cost-efficiency.
• It offers choice : Investors can choose from Equity Biased (E), G-Sec Biased (G) and Corporate Debt/Fixed Income biased (C) models. Investors can also indicate a mix amongst all three. Equity Investments are restricted only to the NIFTY 50 index. This Passive Investment diktat makes sense, as this represents an adequately diversified portfolio and also keeps cost of fund management low.
• It offers mobility : Investors can change their PFM of choice, by indicating the same to the CRA. With the CRA issuing all subscribers a unique PRAN (Permanent Retirement Account Number), hopefully this number would make all record-keeping easy. Issue of PRAN will ensure portability across geographies as well as jobs.
• It offers convenience : With several PoP (basically PSU Banks), reach is not a problem. And with NSDL taking care of the back-end, there would be no opaqueness that the present EPFO is notorious for.
• It offers transparency (hopefully) : While there is not much information about disclosures and reports, there is hope that there will be portfolio disclosures, toll-free numbers (for customer service) and updated account statements after every transaction, or atleast a consolidated one every year.

With a new Defined Contribution model (unlike the present Provident Funds, which are Defined Benefit), NPS is all set to revolutionize the Pension planning scenario. If successful, then this would be as pioneering as the introduction of mutual funds or the entry of the private sector into insurance.

What appears now to be just a small step is indeed a giant leap for financial planning in India. So let us not forget the importance of April 1, 2009. No April Fool prank this time.