Why New Pension Scheme has failed

It's a year old now. The New Pension System (NPS), which aimed at reaching out to 270 million people, or 90 per cent of the workforce, has covered only a miniscule 4,600.

Of course, the overall number may be much higher at around 873,000, but most of it is amassed by government servants who have joined after June 1, 2004, and whose mandatory retirement savings are being invested in the scheme.

What has made the NPS, one of the most advanced and cost-effective schemes, such a non-starter? Here are some key reasons.

Access. We receive several queries from readers on how to subscribe to this scheme. This is surprising, especially when most banks, including bigwigs such as State Bank of India and Axis Bank, are already acting as points of sale for it. One of the reasons is that there is no direct incentive for people selling the scheme.

"Due to lack of participation by service providers, NPS has not reached out to the masses. We are looking at providing direct incentives of fixed nature to people selling it," says N.R. Rayalu, chief executive of the NPS Trust.

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Complex mechanism. Electronic clearing system (ECS) is not available at all the points of presence (POPs). Currently, only a handful of them, including CAMS and Axis Bank, are providing this facility.

In the age of online transactions, you cannot expect the customer to visit a branch every time he needs to drop a cheque.

Tough rules. Subscribers need to make a minimum of four contributions in a year. This means four visits to the branch and keeping track of all those payments. Moreover, a minimum contribution of Rs 6,000 could be slightly high for very small investors to shell out.

Cheap? Not really. A back-of-the-envelope calculation shows that if you invest Rs 6,000 per annum (minimum investment required) in the NPS, the total quarterly charges, inclusive of opening the account, work out to be Rs 560 (9.33 per cent of Rs 6,000).

Thereafter, Rs 470 (7.8 per cent) is charged every year, excluding a fund management charge of 0.0009 per cent and other custodian charges. To lower the charges further to 2 per cent, one has to invest at least Rs 30,000 annually.

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No premature withdrawals. Withdrawals are not allowed except for special cases. Even at the age of 60, you can only withdraw 60 per cent of the corpus as cash, and the rest is used to buy an annuity.

If you want to withdraw before you turn 60, you would need to buy immediate annuity with 80 per cent of the money accumulated. "This is a retirement-focused scheme. If we allow withdrawals at an early stage of the policy, it will not serve its purpose," says Rayalu.

Obviously, if the scheme has to shed this non-starter tag, it needs significant reform on many fronts.

Said Kanwar Vivek, managing director, Aditya Birla Money (a brokerage house) at the Outlook Money Pension Roundtable in March: "If you see the NPS, it's clear that unless there is some incentive for the intermediary in the scheme, it is a very difficult task to popularise it." Are the policymakers listening? Well, they would do better to.

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One Scheme, Several Roadblocks

Availability: People remain confused about how to subscribe to the NPS. This is partially due to lack of interest by service providers in selling the scheme.

ECS Blues: Electronic clearing service (ECS) facility is not available at all points of presence (POPs). This makes depositing money a cumbersome process.

Rigid Norms: As the scheme requires a minimum of four contributions every year, chances of people missing one or two payments are quite high.

Fixed costs: For very small investors, the NPS does not turn out to be cheap as most of its charges are in the nature of fixed costs. One of the main attractions takes a hit.

Restrictions: Premature withdrawals are not allowed under NPS, which makes the scheme less attractive in comparison with other retirement benefit schemes.