New Pension Scheme- Is it an Efficient Retirement Tool?

New pension scheme is regarded as the lowest cost scheme in the world. Initially it was launched only for government employees to reduce deferred pension liabilities on state & central governments but later it opened the gate to all individuals. The scheme got a lackluster response and only government employees joined it that too forcefully. Private sector employees have been hesitant to contribute to this scheme primarily due to lack of clarity on benefits and distribution network.

PFRDA has been making many changes in the scheme to ensure it reaches out to maximum people and accepted as a viable instrument for retirement planning. However, one need to analyze the product in detail to understand whether it meets your requirement.

Here are some positives and negatives of the schemes which investors should consider before making a decision for their golden years-

Advantages of NPS

1. Low Cost -NPS is surely the lowest cost product in the world. With a Fund management charge of .00009% (increased up to .25% for pvt employees) , it can do wonders for any investment. Even if the cost of record keeping agencies and others are added up the cost is still lower than any other comparable instrument. For  e.g. in a study by ET Wealth if one invest Rs 1 lakh for 25 years, NPS fund can grow up to Rs 88 lakh while the same investment will be worth Rs 66 lakh through mutual funds. This huge difference of Rs 22 lakh is due to the difference of almost 1 % in the  charges between these two instruments.

2. Restricted Withdrawals– The regulator has restricted the amount of withdrawal one can make from NPS. This is highly positive as retirement is a long term goal and we have a tendency to utilize whatever is reachable if we fall short in our immediate requirements. By capping the withdrawal, the regulator has ensure most of your contribution goes towards your golden years only.

3. Automatic Asset Allocation– Not many investors are financial savvy and are not able to apply asset allocation strategies themselves. Automatic Asset Allocation in NPS helps in rebalancing your investments to more secure asset class as you reach near your retirement years. One can surely choose his/her asset allocation as per his requirement but for Small investors who do not have enough knowledge and cannot bear the cost of hiring an advisor, the feature is an attractive proposition in the product.

4.P rovision of annuity- The regulator has awarded six companies from where the subscribers can buy the annuity. This is a good move as one will have a choice to select an annuity provider which si able to give him/her the bets rates.As the product catches interest among Indian people and annuity markets evolves, subscribers of NPS can expect better annuities when they retire.

 Disadvantage

1. Restricted Equity Exposure– Retirement is a long term goal and exposure to right asset class is necessary to achieve it. NPS restricts equity exposure to 50% which is a deterrant to very young investors who have a higher risk taking ability and enough time horizons to accumulate. Even if the Equity:Debt allocation has been equivalent to a balanced mutual funds scheme it would have been a highly lucrative product for this class of investors. With existing allocation one will have to look at generating higher returns from debt segment too to accumulate a good corpus which is difficult if you do not have expertise to understand interest rates movement.
2. Choice of Fund Manager:  It’s not necessary that a fund manager good in equities have the same capabilities in debt. In a year horizon the performance may change from one fund manager to another due to various reasons. NPS has not been highlighting returns generated by fund manager which makes it difficult for investors to make a decision on selection of fund manager. For e.g. Returns generated by Kotak in last three years has been  highest  in C Fund  which makes it an efficient debt fund manager. Unless investors have access to these data the choice of a fund manager or allocation of funds contributed will be a difficult decision.

Nevertheless, with all  these plus and minuses there is no doubt that, NPS scores on many front. Low cost, automatic asset allocation, Restricted withdrawals are features which no other retirement tools matches today. In the absence of pension plans from insurance companies, NPS is a highly recommended tool if benefits are utilized efficiently.

As published in Business Bhaskar on 29th Sep’ 2012