Pension Regulator PFRDA changed the Incentive Structure to boost National Pension System

The poor performance of National Pension System, or NPS led the Pension Fund Regulatory and Development Authority (PFRDA) to change the incentive structure for the distributors from a fixed sum to a percentage of the investment amount. So far the points of presence or the distributors used to get a flat Rs 20 as initial subscription charge and Rs 20 for any subsequent investment.
PFRDA’s measure is poised to serve two purpose- bringing about a more equitable incentive structure and incentivizing the distributors to push NPS.

The regulator proposed to lay down criteria for pension fund managers and grant licences to anyone who qualifies. The NPS has seven fund managers overseeing assets of Rs 10000 crore.

Measures as per Bajpai Recommendation

The pension regulator on the basis of the recommendation of the G.N. Bajpai committee constituted by PFRDA to review NPS,  fixed the incentive at 0.25% of the subscription amount. The committee had suggested 0.50% of the investment, subject to a minimum of Rs 20 and maximum of Rs 50000.

As per PFRDA’s measures announceds, a distributor will get a flat Rs 100 on initial subscription and 0.25% of the initial subscription amount. Every year on subsequent investments, the point of presence will be entitled to 0.25% of that amount. The minimum that a point of presence can charge is Rs 20 and the maximum Rs 25000.

Bajpai committee had observed that the earlier structure of the pension system was amounting to the poor subsidizing the rich—a person investing Rs 6000 and a person investing Rs 1 lakh were both paying Rs 20. Also the fixed sum was acting as a deterrent to sell NPS amid better commissions-yielding products such as insurance policies.

National Pension System

NPS was primarily targeted at the unorganized sector, which does not have any form of social security. However, so far only about 1 million people out of a workforce of about 400 million in the unorganized sector have joined NPS.

Floated for civil servants in 2004, the NPS was opened to all citizens in May 2009 to provide a pension option to 360 million informal sector workers bereft of any old-age income security.

What Finance Ministry has to say

In order to raise the subscriber base of the New Pension Scheme (NPS), the Finance Ministry is currently targeting the employees of the various members of industry bodies such as the Confederation of Indian Industry (CII), the Federation of Indian Chambers of Commerce and Industry (FICCI), and the Associated Chambers of Commerce and Industry. The Ministry wrote letters to industry chambers, asking them to persuade their members to subscribe to the NPS.

The government also favoured lower fee for NPS. It proposed to slash the account maintenance fee by Rs 180 to make it more attractive to workers in the informal sector.

The finance ministry opposed a proposal for a 500-fold increase in the fee charged by fund managers of the New Pension Scheme. The Ministry’s representative on the board of interim pension regulator PFRDA opposed the proposal to increase the fund management fees up to 0.5% from the current 0.0009%.

The ministry also rejected PFRDA’s suggestion to relax the norms for appointment of fund managers handling the NPS, a retirement savings scheme launched initially for government employees.

The whole idea of the NPS is that large sections of the unorganised sector should avail the benefits. According to the Ministry, the increase of fee will act as deterrent.