Sunday, November 15, 2009

Performance of NPS - National Pension Scheme

NPS has huge subscriber base - though the unorganized sector is still a small number. Once there are substantial subscribers from the unorganized sector, NPS will become a huge force in the finance sector. Subscribers registered under NPS as on October 23, 2009:

Government: 540013
Government Autonomous Bodies: 653
Governments: 110298
Unorganized Sector: 2352
Total: 653316

SBI Pension Fund continues to be the best pension fund manager for the New Pension Scheme (NPS) opened for the Central and state government employees. SBI, which manages almost Rs 1,650 crore, has generated 13.41 per cent return in the first six months of the fiscal. For the last financial year, SBI had generated 16.5 per cent returns.

During April and September 2009, two other pension fund managers — UTI Retirement Solutions, with a corpus size of Rs 1,200 crore, and LIC Pension Fund, with Rs 150 crore — have managed to generate 12.73 per cent and 10.57 per cent returns respectively. On the whole, nearly 6.48 lakh subscribers have gained an average weighted return of 12.38 per cent between April and September. Last year, SBI Pension Funds had generated 16.5 per cent return, UTI managed 13.5 per cent and LIC generated 11.6 per cent returns for its subscribers.

The two mutual fund pension schemes in comparison fared better. The pension corpus of UTI Retirement Benefit Pension plan grew by 24.68 per cent during the same time. While Templeton India Pension, on the other hand, has registered 23.47 per cent return in the first six months of the fiscal. Both these funds invest had more than 50 per cent in debt and around 40 per cent in equities. The NPS, however, has restricted its equity exposure to 15 per cent and has invested heavily into debt instruments.

This scheme was opened to Central and state government employees (except defence services) with effect from January 1, 2004. The pension corpus stands at over Rs 3,000 crore.

The fee structure of NPS has attracted a lot of criticism, much of which focuses on levying administrative charges even on the minimum annual contribution of Rs 6,000. However, a patient analysis of cost structure, the nature of services of various entities and long-term benefits of retirement savings through NPS would dispel the initial impression about the charges. Under the NPS, there are separate charges. The CRA charges Rs 50 for opening an account, Rs 350 for annual maintenance and Rs 10 per transaction. Likewise, the POPs charge Rs 40 for initial subscription registration and Rs 20 for subsequent registration and the PFMS charge investment management fees at the rate of 0.0009%. The charges for custodian and trustee bank are insignificant. Account opening and PRA maintenance charges of the CRA are not static; annual maintenance charges and per transaction fee will decline to Rs 250 and Rs 4, respectively, when the number of accounts with CRA reaches 30 lakh. Initial charges for the minimum contribution in the initial years seem high in NPS. But it is a national scheme and open to all section of investors, therefore, the total cost will decline with an increase in contribution amount. The NPS costs are comparable with mutual fund. Some analysis shows that overall cost, including fund management, distribution, custodian, registrar and so on in case of mutual fund comes to 2.25%. However in NPS, one time investment of Rs 20,000 would cost approximately 2.21%. The most important component of investment management is the fund management fee — it is 0.0009% (based on assets under management) compared to 1.25% for the mutual fund. Fund management fee for NPS is probably the lowest in the world. Further, there is no guaranteed return in DC. Even so, fund managers need to set an implicit performance and liability benchmark for themselves to ensure better return and to manage liability driven investment management (LIDM ).

NPS is, thus, a performance driven system and cost should not be considered in isolation of performance. NPS is in its nascent stage, operationalised in phased manner since April 2008 - it will eventually get evolved over time and be a very good investment opportunity for investors!

If NPS interests you and you want to find out more about applying and other details - checkout my previous blog on NPS!


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