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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Well here is my take (and it is very different from what everybody else in the business has to say):

1. Employees Provident Fund (EPF): you do not have too much of a choice, do you? If your company has a provident fund scheme and there is a deduction happening at source, well you are in it. This fund normally gives 8.5% p.a. – however this year was a one time bonus and the interest accrued / paid was 9.5% p.a. Well you really cannot do anything – if you have it, keep it, if you do not have, well you do not have!!

2. Public Provident fund: Only if you are 45+ years of age have a super surplus over and above what you can happily put in equity funds, and are still wondering what to do with that 70,000 should you invest in ppf. If you are under 45, completely avoid it. Returns will be sub par – surely a NEGATIVE REAL RETURN even assuming 8% interest rates remain constant. Only logic is it is a good debt instrument paying 8% tax free – not sure how long. If you have already opened it, put in a small amount to keep it going.

3. New Pension Scheme (NPS): It is the cheapest fund management scheme in the world, but I do not drive a Nano! It is an inexpensive way of putting your money away for a long period, but fund management skills is a big issue. A fund with 50% in debt instruments (you are better off in PPF dammit, at least the risk is borne by the government) makes little sense. The debt portion will give you a -VE real return for sure. The equity portion is in the sensex – and for me the sensex has a major construction problem. So over all it is a no no from a fund management point of view also!

Now when you get the money back – we have NO clue how it will come back, who will take the responsibility of managing it, what will be the asset management company, will it come by ECS. I have asked these questions and get a typical ‘ration shop answer’ – look dude at .0009 this is what you will get. I do not buy rations either. So no Nano, no rations for me.

4. Unit Linked Pension Plans: these are pension plans created by life insurance companies. These are perhaps the worst products (under the new format of reduced expenses). The way the costs are structured these will all be debt based products. So a debt product, with poor fund management capability, and not knowing what will be the rate of interest when the money comes back to you – to me is a pot pouri of disaster. Stay away. If you are a policy holder under the older plans (I am and so are many friends) stick to it. However do not put too much money into it.

5. Pension plans from Mutual funds: Well Uti and Templeton have pension plans. I like both the plans – Uti for the costs and Templeton for the competence of fund management . Again do not like the fact that it has only 30% in equity – however over the last 10 years I have got a return of 12-13% p.a. which is far superior to PPF. I prefer this to ppf for younger people.

Having said negative things about all the pension plans….where is my pension money? In direct equities, Hdfc Top 200, Icici Pru discovery, I Pru dynamic, Hdfc Equity, Franklin India BlueChip, Hdfc Prudence….

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PPF , PF, EPFO , Mutual Fund Pension Schemes, Retirement Planning products from Insurance Companies, bank fixed deposits and post office schemes. A very small part of the population created its own customized Individual Products. This could be a couple of extra properties creating rental income, shares creating dividend income etc. Many people of the earlier generation would be dependant on their children – willingly, unwillingly, happily or unhappily.

Welcome the NPS -  the new Avatar for Retirement Planning. Created by the government of India it has Some major advantages of the NPS. Let us look at them.

Costs Involved:
i) The total costs involved in terms of % are minimal – cheapest in the world.
ii) The charges are under various heads such as CRA Charges, PoP Charges, Custodial Charges and Fund   Management Charges.
iii)  Flexibility to choose the fund manager, Flexibility to choose the asset allocation.
iv) Portability across the geographical location, Transparency.

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The investment pattern is adjusted to growth and security. It protects against market volatility by allowing a subscriber to invest in a diversified and balanced portfolio. To retain his pension corpus for 10 years after age 60.

Between the ages of 60 to 70 , the subscriber can withdraw  his savings in phased manner anytime the market is favorable.There is also a minimum amount that he should withdraw on a year to year basis from the clients age of 60 to 70 years.

Income stream after Retirement

Mandatory Annutisation of 40% of corpus provision for steady retirement income. The risks of a subscriber outliving his money are reduced as monthly annuity can be purchased for specific number of years.

Illiquid Scheme

Limited scope for withdrawal of pension assets  as a means of transferring resource from period of economic activity to a period of retirement

The NPS seeks to achieve inter temporal  consumption re – distribution i.e. it seeks to change  the consumption behavior of a person over his lifecycle

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The Forgotten Population
    The aged were not considered relevant
    People spent a small time in retirement – the gap between the retirement age to the living time was not much.
    They constitute the invisible population, financially dependant and passive in the economic process – and not vocal
    We need to remember that we will all go through that phase, so let us be prepared
The Pension Coverage

     Pension is synonymous with the formal sector employment
     Only the Governmental sector has a big population which gets an ‘indexed’ pension
     The non formal sector has  no pension coverage

The Pension Debate

    The pension debate is limited to pension in formal sector
     Non formal sector has willingness and capacity to invest
     Surplus income saving combats old age vulnerability
    When security is  the ability to work, old age and ill health result in  abject poverty

The Longevity versus Savings Debate

To those outside formal sector, old age security is available through limited voluntary savings
    The extent of the savings available and longevity decides  the quality of life in old age.

continued….

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NPS is now being made available to the common public from May 2009. Any one can avail himself or herself of this scheme. I am planning to do a small series of ‘What is the NPS’ – right from what is the architecture, the cost, the administration, the jargon (CRA. POP, vesting, annuitizing etc.) over the next couple of weeks.

Even though the plan is just been thrown open to the common man it already has about 500,000 participants – being the government employees who are no longer entitled to a Defined benefit but have to do a defined contribution (oops jargon again – will clarify all this in the jargon buster ….over the next 2-3 weeks

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