NPS (New Pension Scheme) was bad – I have rubbished it enough, but as if all that was not enough, the Parlimentarians have tried to make it worse.

Why should a fund management company have only 26% FDI beats me. Stumped is the word. In the 1990s we allowed 100% FDI in Mutual funds, in 2011 we are worried about 26% in pension funds.

We are worried about 51% in life insurance companies, and airlines. I guess I am too dumb to understand. We will not allow 100% FDI in retail – and it involves a HUGE investment, but we will allow 75% equity of Hdfc Bank and Icici bank to be held by foreigners. We will allow Hsbc and Citibank to sell LIFE INSURANCE and MUTUAL FUNDS to retail Indian customers – and be 100% held by foreigners.

Ok, so 26% it is.

Then there is a Minimum Guarantee that is to be paid! Vow. How the hell will this be implemented? who will bear the risk? What will be the time frame? I mean if I am a 22 year old starting an account, when will the guarantee kick in? Every year or only at the time of the withdrawal? Thoughtless suggestions hurt the industry.

Having said that, I have seen the returns that clients have got in the DEBT schemes of the NPS – the standard deviation confirms my worst fears – easier to find a decent equity manager, but finding a decent debt fund manager seems to be impossible. That is scary. If one fund manager gives you 1%p.a. and another gives you 8%p.a.  – what are people supposed to do?

I can imagine a shrill discussion (shout session?) on Tv after which many people will move from the fund with 1% return to the fund with 8% return. Next year there will a ‘Return Reversal’ – and lo! the same people will again be in a discussion. God bless them all. I will be watching Comedy Circus.

Then there is another clause which they want to insert- The Withdrawal Clause- The very purpose of creating a pension plan is to lock it in for a person’s old age or to meet a critical illness post say, 55 years of age. There is no point in allowing a scooter loan, daughter’s marriage, wife’s remarriage, painting the house,…blah blah kinda loans. To beat this very thing a 2 tier NPS was created (or so I thought, my mistake!). Tier I (compulsory) NPS does not have a withdrawal facility but Tier II (optional) has a withdrawal option. Younger people should obviously open both and accumulate MORE in the tier II account. Frankly did not think this was rocket science. I think the parlimentarians were not briefed well by the experts and hence this suggestion – I hope this suggestion is not taken too seriously. The very purpose of creating a Tier I and Tier II would be lost.

One thing I have been screaming about is – Can the PFRDA say what will happen to the accumulated amounts? How can it be withdrawn? Will the protect it by a specific provision in the Sec 10 of the I T Act, 1961?

Will they say Rs. 25L will be automatically transferred to SENIOR CITIZEN ACCOUNT AND the account holder and his spouse WILL get an assured return of 12% p.a. FOR THE REST OF THEIR lives (9% interest and 3% return of capital) – without any money going to the heirs? Some people who live till 90years will be some kind of a drain, but those who die at 63 years of age will give a HUGE surplus! Of course these nos. are arbit – actuaries can work out better numbers. There should obviously no ‘asset management charges’ – and all this should happen from the Government’s consolidated fund. Here there may be a sense of subsidy, but at least there will be no guarantees during the accumulation stage!

What say Gautam Bharadwaj of IIEF and other pension experts?

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  1. NPS also needs to do away with index investing in equity component.

    But few good points from tax point of view.

    1. With effect from april, 2012 the employers contribution will be allowed as a deduction subject to 10% of salary over and above 1 lakh deduction. Hence the cap of tax deduction just got bigger.

    2. It is proposed to amend section 36 so as to provide that any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD on account of an employee to the extent it does not exceed ten per cent of the salary of the employee in the previous year, shall be allowed as deduction in computing the income under the head “Profits and gains of business or profession.

  2. “wife’s remarriage loan”…Ha ha subra at best:)
    Whenever govt comes with grand scheme like this, i remember this Thomas Jefferson quote, ‘A government big enough to give you everything you want, is strong enough to take everything you have’ and steer clear of the bullshit.
    Thanks to the learnings from your blog!!!


  3. Dear Subra, Till date I have not started my NPS account & after all the yes & no, come & go (policy decisions) by the Govt. of India. I’m not going to put my money in NPS.



  4. who is the lobby that wants 26%? is it the unions? i guess nobody else has a dog in the fdi fight.unnecessary fearmongering as it is.

  5. Dear Amit, the withdrawal from the Tier 2 account ‘ll be added to your income from all other sources & thus ‘ll be taxed at your slab rate.



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