While the New Pension System (NPS) has generated double-digit returns for FY13, the charges levied by the retirement fund are still a major deterrent for small investors. For private subscribers, the corporate debt scheme has generated a return of 14.19%, followed by government debt at 13.52% and equity at 8.38%. For government employees, the state and Central government schemes generated 13% and 12.39%, respectively. However, such robust returns are beguiling for small investors in the private sector who end up paying charges as high as 8%.
The cost structure followed by PFRDA is based on the absolute amounts every subscriber is required to pay to each stakeholder in the NPS architecture. It is an inverted structure where it penalises small-ticket contributors who cross-subsidise large contributions. The bulk of the money goes to the central record agency (CRA), which, in this case, is the National Securities Depository. It charges R280 as annual maintenance per person. In the first year, a subscriber has to pay about R400, which includes an account-opening charge, annual CRA maintenance charge, each transaction charge and fund management charge. Most deductions are done through cancellation of units, which bring down the net returns.
So, for a minimum investment of R6,000, fund charges work out to around 8%, which is way higher than for any other comparable products like EPFO, mutual fund or an insurance scheme. If a subscriber pays the amount in 12 instalments, the fee can be as high as 10%, which reduces the returns from NPS. The CRA has said that it will reduce the fee from R280 to R250 per year when the number of accounts reaches 30 lakh.
Similarly, it will also reduce the transaction charges to R4 per transaction compared to the R6 it charges now once the subscriber target is achieved. CRA maintenance charges include those for maintenance of electronic information of balances in the PRA, for incorporating changes in the PRA details received by CRA in electronic form and for sending annual account information once a year in printed form.
Analysts say transaction costs can be brought down as the annual NSDL fee is R70 for NPS-Lite (for deposits below R12,000 per year). In fact, depositories charge mutual funds a maximum of R8 a folio per year and one folio is equivalent to one NPS account. By that argument, NSDL can easily bring down the charges for voluntary contributors in NPS. While MFs have much higher volumes, NPS will automatically pick up steam once contributors start getting higher returns post deductions.
The Bajpai committee, set up to review pension in the informal sector, has said that NPS needs a dose of cost rationalisation. The fixed charges on account of annual maintenance and transaction charges amount to a large percentage of the amount invested by a small value investor. The same cost is a negligible load as a percentage of investment on a subscriber investing large amounts, says GN Bajpai, former Sebi chairman and head of the Committee to Review Implementation of Informal Sector Pension (CRIISP).
NPS competes with MFs only if you invest over R20,000 annually. Also, the per transaction charge acts as a deterrent for investors who save small amounts in multiple transactions. Analysts say the government can underwrite the CRA charges or bring in more record-keeping agencies to promote competition, as originally planned.