A Rapid Death

The New Pension System (NPS), which should have become an important part of the country’s savings landscape, is dead, at least for the time being. This, more or less, is what a government committee set up to examine the NPS is saying. The recommendations of the ‘Committee to Review Implementation of Informal Sector Pension’, (the Bajpai committee on NPS reforms) have been put up on the PFRDA website, inviting comments. The part of the report that has attracted the most attention is the recommendation that a 0.5 per cent commission should be paid for selling NPS. While this itself is a huge departure from the original structure, it is actually not the most important part of what has been said.

In a cogent and lucidly-written report, the committee has found that practically everything about the current design of the NPS is flawed. No one is willing to buy it and no one is trying to sell it. Almost all the money that has flown into the NPS comes from the government employees who are part of it. We’ve been hearing recently that only about Rs 100 crore has come into the NPS by choice. However, the report reveals that even this sum is almost entirely due to two corporates shifting their pension system to the NPS. Direct participation by end-users is close to zero. In other words, the NPS has been a complete failure.

There’s one aspect of the NPS’s condition that hasn’t attracted any comment, and that is the failure of the governments—both state and central to properly implement the government employees part of the NPS. The way it was supposed to work was that each government employee under the NPS would have an account which he would be able to monitor and watch it grow. Starting 2004, these investments—with their equity allocations—would have given superb returns that would have been far superior to plain fixed-income ones. What’s more important, we would have had about 12 lakh (the report’s number) government employees who would have had the personal experience of growing their future wealth through the NPS.

This never happened. The core pension implementation of the NPS is a complete mess. The money wasn’t invested for years after 2004. The employees don’t have personal accounts with the NPS’s CRA (central record-keeping agency). They don’t have any first-hand information of how the investments done in their name is being managed. They don’t know what is being earned, they don’t know which fund manager is doing better and which worse.

The extent of the mess is borne out by the fact that this committee was unable to discover how many employees are covered by the NPS and whether all those who have joined government jobs since 2004 are indeed part of the NPS or whether their pension deductions are in some limbo somewhere. Here’s a statement from the report that should shock you: …it is not yet clear (on the basis of PRANs registered) whether all the central government employees who have joined service after January 1, 2004, have become NPS members. There is no concrete evidence or any authorized government document to back this up, but going purely by the number of investors and the headcount of new appointments, there seems to be a gap.

These people could have been the satisfied seed population around whom the NPS could have grown. Sure, there are a lot of genuine issues with the NPS’s current structure and the committee’s recommendations cover them extensively. It’s refreshing to read a clear recognition of the fact that financial products have to be sold actively and that the banks are going to sell what makes them money and not what is in the best interests of their customers. At the end of the day, it’s hard to avoid the conclusion that whether as a pension mechanism or as a discretionary savings vehicle, the NPS’s launch-to-mess trajectory has been short and rapid.