ET BureauThe National Pension System (NPS) needs intelligent government support. The state must support fund management costs and record-keeping costs till the corpus becomes large enough to generate economies of scale. The NPS is a defined contribution scheme open, initially, to employees joining government service from January 1, 2004, and later to voluntary subscribers.
Two of the 10 firms in the race to manage voluntary contributions to the NPS have reportedly dropped out, judging the fee to be too low to meet costs. It’s unfortunate, but hardly surprising. Fund managers need to run a viable business. Their fee should cover costs that include investments in marketing and sales, especially when private sector employees are not exactly joining the NPS in droves.
A yearly fund management fee of 0.01% of the corpus offered this time is higher than the initial yearly fund management fee of 0.0009%, but nowhere close to 1.5% charged by mutual funds within a total cap of 3%. Fund managers should be offered fees to cover costs, that will drop as more people join the scheme, and for good reasons. The NPS is a sound vehicle for Indians to build their pension pot as it offers superior returns than the dysfunctional employees’ provident fund scheme. It offers employees choice of their fund manager, and flexibility in asset allocation. What the scheme lacks is marketing. And to market NPS better, incentives must be upped for fund managers and distributors.
The state should make better use of its pension subsidy, Rs 1,000 for every unorganised sector worker who signs up. A better way is for the government to use the money to underwrite initial overhead costs in asset management, distribution and central record-keeping. Milestones can be set for fund managers to taper off the subsidy.
Two of the 10 firms in the race to manage voluntary contributions to the NPS have reportedly dropped out, judging the fee to be too low to meet costs. It’s unfortunate, but hardly surprising. Fund managers need to run a viable business. Their fee should cover costs that include investments in marketing and sales, especially when private sector employees are not exactly joining the NPS in droves.
A yearly fund management fee of 0.01% of the corpus offered this time is higher than the initial yearly fund management fee of 0.0009%, but nowhere close to 1.5% charged by mutual funds within a total cap of 3%. Fund managers should be offered fees to cover costs, that will drop as more people join the scheme, and for good reasons. The NPS is a sound vehicle for Indians to build their pension pot as it offers superior returns than the dysfunctional employees’ provident fund scheme. It offers employees choice of their fund manager, and flexibility in asset allocation. What the scheme lacks is marketing. And to market NPS better, incentives must be upped for fund managers and distributors.
The state should make better use of its pension subsidy, Rs 1,000 for every unorganised sector worker who signs up. A better way is for the government to use the money to underwrite initial overhead costs in asset management, distribution and central record-keeping. Milestones can be set for fund managers to taper off the subsidy.
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