Hemant G. Contractor, Chairman, Pension Fund Regulatory and Development Authority (PFRDA), talks to Money Today about making the National Pension System (NPS) more attractive, among other things. Edited excerpts:
MT: Compared to other retirement products, the NPS has not managed to garner a big corpus. Why has the scheme failed to reach out to a large number of people?
Contractor: At Rs 80,000 crore, the corpus is not very small. We have about 80 lakh subscribers and have been growing at a 22 to 23 per cent rate annually. As per the Budget announcement, you can invest an additional `50,000 exclusively in the NPS. So, going forward, we expect a big boost. The government has announced the Atal Pension Yojana, which we are going to administer. With all these things, the pension corpus is expected to grow at a substantial rate.
MT: How has the response to the NPS been post-Budget?
Contractor: It began on April 1, 2015 and many people are inquiring about it. This year, we expect to open many more accounts. Any taxpayer would be interested in it as it has additional tax deduction, which is not available anywhere. It is exclusively for the NPS.
MT: There is not much clarity on the choice between the EPF and the NPS. What is the current status?
Contractor: The EPF is a mandatory scheme. So, how does a person exercise his/her choice? Moreover, in the EPF, the employer contribution is 12 per cent, but there is no mandatory requirement in the NPS. Legislative changes will be required if the choice has to be given.
MT: Do you plan to increase commission rates for distributors?
Contractor: Distribution is something we are paying a lot of attention to. On paper, we have many points of presence. We have 70,000 outlets, but only around 10 per cent are working. Most are not very active. We want to activate them. We are looking at the compensation structure and will modify it slightly to make it attractive. We will not increase it very much because it is a good product. Its returns are comparative to the industry. At the same time, it is complicated as it is a long-term product so people are hesitant to invest. To sell a pension plan, a bit of explaining is required [and] that is what the distributors need to do.
MT: The investors don't like the compulsory annuity feature at the time of retirement. What is your take on it?
Contractor: It is a pension scheme, i.e., when a person retires, he should get a regular income, which is provided by annuities. If you allow cash withdrawal, he will burn up the whole money in no time. He will not know how to invest. That is why compulsory annuitisation is there. This is what we have to keep explaining. Pension is a long-term product and people are not prepared to wait that long, but we try to explain [to them] that you need to have steady income when you retire. It is a process of awareness creation and financial literacy.
MT: Though the NPS allows 50 per cent equity exposure, the average exposure is just 15 per cent. Why?
Contractor: We are trying to figure it out because when you go to any conference, the first thing you hear is when will you allow 100 per cent equity. But even with this 50 per cent [equity exposure] that we have allowed, the actual investment is around 15 per cent. This year investment in equities has gone up. We are expecting it to go up further. When it comes to putting [investing] money, people like playing safe.