Drawbacks of the pension (NPS) scheme
The National Pension Scheme is being hailed as the next best thing to sliced bread! Well I have nothing against a scheme which is so loved by all, but let us look at some of the drawbacks that I can see in the NPS.
Well in any wealth management scheme there are 2 things to worry about – sales cost (how much of your contribution gets invested) and the cost of managing these funds. On both these counts the NPS scores and scores very well. In fact it is the Nano of the fund management industry and should have set the cat among the pigeons on both these grounds. There are no sales costs and the fund management costs at .0009 is really the lowest in the world.
However the government has not clarified what will happen to the money once you reach the 'withdrawing' or the 'reaping stage' as it is called.
Maybe in 1962 NASA knew how to put a man on moon, but it was only in 1968 that it knew how to bring him back to the earth. So it was only in 1969 that the man was actually sent to the moon! The managers at the NPS have to admit that putting a man on moon and bringing a man back are very, very different technologies. Even if I am convinced that the managers know how to manage the money at the accumulation stage, they may not be in too great a position to price the annuity. If the government tells a saver that 50% of the accumulation can be taken immediately, but the balance will be compulsorily converted into an annuity! Now the investor is doomed because he cannot argue about the pricing of the annuity.
This is scary. All the charges are specified for a period of 3 years – what happens if the charges are changed dramatically after a person has accumulated a lot of money in the fund? If a mutual fund were to increase charges, at least you can just walk away. In an NPS it is not possible – it is clearly till 'death do us apart' relationship.
The provision in the latest budget allowing the employer to claim the contribution as an expense could improve the penetration among the employer community.
Are simple solutions available?
1. The government should announce what will happen to the corpus – after the person retires.
2. The government should allow a Systematic Withdrawal Plan – useful especially if a person lives long, and is willing to be in equity from age 60 to end of life.
3. The government should announce that the annuity will be at a rate NOT LESS THAN the rate at which the government collects money in PPF or senior citizen scheme.
4. India's indices are not so great, so there should be a greater range of indices that a person should be able to choose from.
5. More government push will be necessary – the government can push it through and make it compulsory for the Railways, the Defence forces, etc.
6. As the corpus increases the costs will fall - hope there is a greater participation by the middle class of India!
7. Participants should be allowed to choose date of entry, and also date of stoppage and date of annuitization. Allowing a minor's account is also a good idea.
8. Part withdrawal should be allowed – why should I not be allowed one annuity every year that I find the markets attractive? In the sense that from my age of 60 till my age of 75 I should be allowed to contribute as well as withdraw – like a mutual fund. Depending on how attractive the anuuity markets are I will decide how much of annuity to buy and when to buy.
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