'We never expected NPS to have a spectacular beginning'

Why hasn't the NPS received a good response?
The NPS is not like the insurance and mutual fund models, where products are pushed through commissions. It doesn't have agencies and no one is selling the product. In fact, to subscribe to the NPS you have to go to a point of presence (PoP). So it is a 'pull' product, not a 'push' product. We never expected a spectacular beginning. We adopted the direct selling model for two reasons. Firstly, due to mis-selling by agents, we didn't want the NPS to get a bad name over time. Secondly, if you have an agent, there's a cost, and we wanted to keep costs low. We knew we would compete with insurance products and mutual funds, which are pushed by agents and were marketed aggressively due to the 2.25 per cent load (now removed). We don't have entry or exit loads, so we don't expect the NPS to have an aggressive beginning. To ensure low costs, there is no marketing by PoPs; they get only Rs 20 per transaction. It includes uploading a subscriber's data and sending the contribution to the NPS trustee bank.

Isn't Rs 20 too low an incentive for PoPs?
I agree, but if you go to a private bank, they don't charge for any transaction. Also, a couple of private banks are PoPs as well. In all, there are 21 PoPs.

What steps are you taking to generate pull for the NPS?
We have a multi-pronged strategy. We are talking to the government to pick up the cost. The low cost will be a pull factor. We are also talking about online payments and of a low-cost central record-keeping agency. We are also thinking of giving targets to PoPs. So if they bring in a certain number of subscribers, they could be incentivised with bigger margins, but without affecting the consumer (fee will be the same). Financial advertising and education will also be important factors. We are working on a plan to create awareness about the scheme.

Some bank representatives push their own pension products when asked for the NPS form. So there is mis-selling even at the PoP level.
I agree and we are aware of this. The PoP doesn't just sell its own pension plans but mutual funds and insurance plans too. So there is a conflict of interest and a bank that is a PoP would like to push other products unless you insist on the NPS. They are not interested, but we are being patient. We want people to know more about the NPS, and when they do, maybe they will insist on buying it. I’m not going to be tempted to have a marketing network similar to that for insurance and mutual fund firms.

Are you waiting for the Pension Bill to be passed?
We can have a greater say in the scheme only if we have a statutory status. Today, we have to get everything cleared by the government, and while it has accepted many proposals, these take time. For instance, two months ago we proposed that the government pick up the cost of the NPS as it does for similar products like EPF. Why should the government discriminate in favour of the organised sector? We are not saying big companies should be funded, but it can be means tested. We haven't got a response yet.

Given that the NPS is a long-term product like PPF and EPF, shouldn’t NPS withdrawals also be tax-free?
We said as much even before the product was launched. This is one reason why it has not picked up as every other savings product is tax-free at every stage. NPS is also a social security product and meant for a much larger population (there are more than 320 million people in the unorganised sector). But we have never asked for a preferential tax treatment, just a level playing field. The government has indicated through the Direct Taxes Code that it intends to make every product EET, instead of taking the NPS to EEE, providing a level playing field.

Pension fund managers have been allowed to invest only in firms represented in the Sensex 30 or Nifty 50. Will this restrict the returns? Do you see this changing?
Not in the foreseeable future. The reason is that we have to be very careful. After all, it is a pensions product for retirement, not an investment scheme. In fact, I would advise people that if they are looking for pure investment, they should not join the NPS, because if they do so, they have to stay with it for 30 years. So if subscribers are trusting their money for that long, I am obliged to keep it as safe as possible. That's why they can invest only in index funds—Sensex 30 and Nifty 50. We may open more index funds later, but no individual stock pickings will be allowed as it will lead to speculation and can be purely discretionary, which carries a lot of risk. So I don't see this happening in the medium to long term. Perhaps later, when the scheme has stabilised and there is confidence in it and financial markets have developed more than they currently are.

What is the default option?
If a subscriber doesn't go for the active option, we have a default option. It begins with a 50% equity exposure till the age of 35. After that it declines at the rate of 3 per cent per annum; 2 per cent exposure to equity declines and 1 per cent to corporate debt. This 3 per cent is added to government bonds. The idea is that when you are 55, nearly 80 per cent of your money is invested in government securities to preserve capital.

Which is the flexible account being offered to NPS subscribers? How does it work?
A tier 2 account is being introduced from December 1. Unlike the tier 1 account, tier 2 will be withdrawable and you can operate it almost like a savings account. You have to be an NPS subscriber to a tier 1 account to be eligible for the flexible account. All the usual investment options available in the tier 1 account will apply.

(D. Swarup is the former chairman of PFRDA)