NPS Tier-II scheme treads on domains of mutual fund houses and banks

Another regulatory conflict is in the offing between the financial sector regulators as the Pension Fund Regulatory and Development Authority (PFRDA) gets set to launch the National Pension Scheme (NPS) Tier-II scheme. As the scheme resembles liquid funds of mutual fund schemes and of bank deposits, PFRDA will enter the regulatory domains of the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI), respectively.

PFRDA, which was set up to offer the National Pension Scheme to Central government employees and employees in the unorganised sector, had proposed to offer anther scheme called the Tier-II withdrawable account to its members. The scheme, which a member may opt for voluntarily, allows for withdrawal of the amount deposited in the scheme at any time, unlike the Tier-I scheme, which puts some conditions for premature withdrawal (before attaining 60 years of age).

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"The government will make no contribution into this account (Tier-II). These assets would be managed in the same manner as the pension. The accumulations in this account can be withdrawn anytime without assigning any reason," PFRDA said in its website.

However, with NPS not promising any assured returns, the Public Provident Fund (PPF) scheme, which provides an assured return of over eight per cent, could be a better option for investors, particularly as this is a saving for the retirement or for meeting one's unforeseen needs.

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The Committee to Review Implementation of Informal Sector Pension (CRIISP) headed by G.N. Bajpai, former chairman of Sebi, prodded PFRDA to continue with the Tier-II scheme for now. The committee looked into the issues that are hindering NPS from gaining popularity and suggested means to improve participation of nongovernment employees in it.

"PFRDA should continue with the Tier-II for the moment but put in place adequate regulatory safeguards for this product in consultation with the RBI (with regard to the savings bank characteristic of the product) and the Sebi (from the viewpoint that the funds management activity takes on the features of a liquid mutual fund)," CRIISP said in its report submitted to the PFRDA early this month.

"The mutual fund industry, which is experiencing a stunted growth after the entry load ban a couple of years back, has to grapple with another rival, NPS Tier-II. This is expected to destabilise the liquid funds market, the growth of which has been the saviour of the industry over the last few quarters," said a senior officer of a mutual fund, who wished not to be identified.

But selling mutual funds will remain more remunerative for independent financial advisors (IFAs) than selling NPS. However, as a pension product NPS could stand out as an option. The committee also pointed out that the reluctance by the POPs (point of presence or contact point with the client) - especially bank-POPs - in pushing NPS products might also be due to an inherent conflict with other products sold through the branch, with incentives higher compared with NPS.

However, it remains to be seen whether the hiked commission of 0.5 per cent would tilt the balance in favour of the NPS.