The New Pension Scheme is one of the more ambitious programmes tried out by the government. If successful, it has the power to transform India's savings habits.
Millions of Indians who, today, don't have a long-term flexible savings option will now have one, irrespective of where they live and where they are employed. Unlike post office accounts and the Employees Provident Fund Organisation, opening and operating an NPS account is relatively easy since there are a host of banks (16 already) and six others (like the Life Insurance Corporation and Reliance Capital) that offer these services across the country.
More important, the service follows you where you go.
Anyone who enrolls gets a unique number from the Central Recordkeeping Agency; each payment made to any bank branch automatically generates a credit in the unique account at the CRA; this number is retain by the saver, irrespective of change of location.
There is a choice of six fund managers as well as a menu of different investment strategies, with varying degrees of risk.
According to the provident fund regulator, the addressable market for the NPS is as many as 80 million people (about 20 per cent of the total workforce).
According to the Invest India Foundation, which is the source of the 80 million figure, the total investible amount is Rs 55,000 crore (Rs 550 billion) per annum; a decade from now, the assets under management will be Rs 12 lakh crore (Rs 12 trillion); within just three years of its existence, its corpus will equal that of the existing, decades-old EPFO.
The problem is with the structure of the fees. At one level, the scheme is very economical -- the NPS' fund-managers have bid a tiny 0.0009 per cent as management fee. Whether they can make money on this is one question.
But savers have other costs. The CRA, for instance, charges Rs 350 per year for maintaining the account, Rs 10 per contribution made and Rs 50 to open the account in the first year; the banks/points-of-presence charge Rs 40 to open the account and Rs 20 per transaction.
Someone who saves Rs 6,000 per year (the minimum allowed) in 12 equal instalments will pay Rs 520 to the CRA (Rs 470 in each year thereafter) and Rs 280 to the bank (Rs 240 in subsequent years) -- that is 12 per cent service charges in the initial year.
As the balance in the fund grows over the years, the percentage cost will drop, of course, but savers may blanche at the initial costs. The flip side of this is that, while a scheme succeeds or fails at the retail level, there is no incentive for banks to canvas the scheme.
The bank earns just Rs 280 in the first year (Rs 240 in subsequent years) from a customer, irrespective of what s/he invests.
If a customer invests Rs 10,000, SBI earns Rs 240. If the same Rs 10,000 are invested in mutual funds, SBI gets Rs 250, and Rs 600-700 if the money is invested in insurance products; if Rs 60,000 are invested, SBI gets Rs 240 through NPS, Rs 1,500 from mutual funds and Rs 4,000 from insurance products.
Which bank will canvas the NPS to the bigger savers? And which small saver would want to part with 12 per cent of his/her annual savings? NPS could catch on, but that will be on its own strength, not because agents promote it.