New Pension Scheme overhaul to see cost cut, more record-keepers
The government will slash the New Pension Scheme's account maintenance costs to a third to make it more attractive to workers in the inf...
https://iskablogs.blogspot.com/2011/09/new-pension-scheme-overhaul-to-see-cost.html
The government will slash the New Pension Scheme's account maintenance costs to a third to make it more attractive to workers in the informal sector. The finance ministry has asked the Pension Fund Regulatory and Development Authority to cut the annual fee to about Rs 100 from Rs 280 by breaking the monopoly of the scheme's current record-keeper , National Securities Depository.
The NPS, floated for civil servants in 2004, was opened to all citizens in May 2009 to provide a pension option to 360 million informal sector workers bereft of any old-age income security. But, so far only 51,000 people have joined voluntarily. Although the scheme's fund management fee is very low at 0.0084%, the annual record-keeping costs are high at Rs 352, comprising a flat fee of Rs 280 and a monthly transaction fee of Rs 6.
On a minimum investment of Rs 500 a month, the two expenses total 5.87% of the savings, nearly thrice the fee charged by a mutual fund. "The cost of NPS should be brought down in the interest of consumers," said a finance ministry official. The proposal for a second central record-keeping agency, or CRA, would be taken up at the upcoming PFRDA board meeting.
This annual fee, including fund management charges, was as low as 2-3 % for some equity-linked mutual funds and if the charges were brought down to Rs 100 annually, an NPS account holder will only have to pay around 1.6% towards CRA charges , he said.
The ministry's decision follows recommendations made by a committee, headed by former Sebi Chairman GN Bajpai, which said that PFRDA should consider inducting a few more recordkeepers as was originally planned. "The flat charges of the NPS are very steep, which tilts the scheme in favour of wealthier investors," the committee had noted.
"In fact, it is likely that the bottom-of-the-pyramid customers end up cross-subsidising the wealthier investors," the Bajpai report said, pointing out that the fixed charges on account maintenance and transaction charges form a large proportion of small investors' pension savings.
TRANSACTION COSTS
Apart from the account maintenance costs, financial intermediaries who route pension contributions to the fund managers also charge Rs 20 per transaction. This adds up another Rs 240 a year. Moreover, NSDL charges Rs 50 for opening an account while PFRDA-appointed financial intermediaries charge Rs 40.
So the flat costs imposed on investors in their first year of opening an NPS account further rises by Rs 90. According to a PFRDA official, a second CRA will bring in more competition, automatically balancing the current charges. "It was earlier decided to go with one CRA until the sector stabilises , but now it is important to bring in other players to reduce the cost," he said.
Many players, including Central Depository Securities, have evinced interest and the recordkeeping fee would go as low as Rs 100, he said. "The first time we invited bids for record-keepers , six agencies had applied. We expect to see the same response."
Courtesy:ET
The NPS, floated for civil servants in 2004, was opened to all citizens in May 2009 to provide a pension option to 360 million informal sector workers bereft of any old-age income security. But, so far only 51,000 people have joined voluntarily. Although the scheme's fund management fee is very low at 0.0084%, the annual record-keeping costs are high at Rs 352, comprising a flat fee of Rs 280 and a monthly transaction fee of Rs 6.
On a minimum investment of Rs 500 a month, the two expenses total 5.87% of the savings, nearly thrice the fee charged by a mutual fund. "The cost of NPS should be brought down in the interest of consumers," said a finance ministry official. The proposal for a second central record-keeping agency, or CRA, would be taken up at the upcoming PFRDA board meeting.
This annual fee, including fund management charges, was as low as 2-3 % for some equity-linked mutual funds and if the charges were brought down to Rs 100 annually, an NPS account holder will only have to pay around 1.6% towards CRA charges , he said.
The ministry's decision follows recommendations made by a committee, headed by former Sebi Chairman GN Bajpai, which said that PFRDA should consider inducting a few more recordkeepers as was originally planned. "The flat charges of the NPS are very steep, which tilts the scheme in favour of wealthier investors," the committee had noted.
"In fact, it is likely that the bottom-of-the-pyramid customers end up cross-subsidising the wealthier investors," the Bajpai report said, pointing out that the fixed charges on account maintenance and transaction charges form a large proportion of small investors' pension savings.
TRANSACTION COSTS
Apart from the account maintenance costs, financial intermediaries who route pension contributions to the fund managers also charge Rs 20 per transaction. This adds up another Rs 240 a year. Moreover, NSDL charges Rs 50 for opening an account while PFRDA-appointed financial intermediaries charge Rs 40.
So the flat costs imposed on investors in their first year of opening an NPS account further rises by Rs 90. According to a PFRDA official, a second CRA will bring in more competition, automatically balancing the current charges. "It was earlier decided to go with one CRA until the sector stabilises , but now it is important to bring in other players to reduce the cost," he said.
Many players, including Central Depository Securities, have evinced interest and the recordkeeping fee would go as low as Rs 100, he said. "The first time we invited bids for record-keepers , six agencies had applied. We expect to see the same response."
Courtesy:ET
