The Pension Fund Regulatory and Development Authority (PFRDA) is reviewing distributor incentives for the National Pension System (NPS). Being a low-cost product, the distribution charges given to PoPs (points of presence) are also among the lowest. PoP are entities such as banks that distribute NPS and earn a commission on it. Currently, PoPs charge Rs125 as the one-time initial subscriber registration charge. Subsequently, transaction charge is 0.25% of the amount received from the NPS subscriber, subject to a minimum of Rs20 and maximum of Rs25,000. Non-financial transaction charge is Rs20 per transaction. However, the incentive structure is under review. “We discussed it in the last board meeting and we will soon take a call on this,” said Hemant G. Contractor, chairman, PFRDA. While Contractor didn’t disclose the quantum of hike, according to him POPs need to be remunerated appropriately. “We definitely don’t want to be anywhere near the levels of insurance or mutual funds, but we need to recognise the role that distributors play in explaining and helping individuals open up to NPS,” added Contractor.
What is NPS?
NPS is a defined contribution pension scheme. In other words, your retirement corpus depends on the amount you contribute every year and the market returns. Currently the maturity age is 60 years but you can defer it till 70 years of age. The minimum annual contribution under NPS is Rs1,000. There are four funds to select from: scheme G invests in government securities, scheme C in fixed income instruments other than government securities, scheme E in equities (limited to 50%) and scheme A invests in alternative asset classes (you cannot put more than 5% in it).
You could invest in these funds as per your choice or choose the auto-choice option that adopts a life cycle-based approach: starts with high equity and tapers it towards maturity. There are three options in auto choice. The aggressive life cycle fund starts with an equity allocation of 75%, moderate life cycle fund starts with an equity allocation of 50% and conservative life cycle fund starts with an equity allocation of 25% till 35 years of age.
Distribution
Traditionally, NPS has been distributed through PoPs. At first, the first time registration charge was Rs20. In 2012 it was increased to Rs100 and then to Rs125 in 2015. Other than this, the fixed cost per contribution of Rs20 to the PoP was changed to an ad valorem charge of 0.25% of the contribution amount.
In 2015, PFRDA launched the e-NPS through which a customer could open and contribute to the NPS online. There are two ways of opening eNPS directly online: through your permanent account number or Aadhaar. Through PAN, you need to pay Rs125 to your bank as KYC authentication charge. Interestingly, despite being a recent route to subscription, eNPS has become very popular as roughly about 30% of the accounts are being opened using the online platform as per industry estimates.
Impact of higher incentives
Given that eNPS is already becoming popular, what is the need to review the distribution costs? “It’s observed that only a certain segment of young and well-off make use of the online facility, therefore PoPs need to be incentivised to reach a larger group,” added Contractor.
PoPs, namely banks, distribute not just NPS but also insurance products where the first-year commission can be as high as 35%. So, will a hike in PoP incentive really help? “Many PoPs are not very active and the fee hike will help a few more get active, but a hike is not necessarily the silver bullet to make NPS popular,” said Kulin Patel, head of retirement, South Asia, Willis Towers Watson. “Bank may still sell more expensive products, but it is up to the industry to make consumers aware of NPS and to holistically consider the product’s expenses, tax treatment and the real purpose of investment,” he added.