Monday, December 19, 2016

Fund Manager and Services for NPS Account

The National Pension System (NPS) regulated by the Pension Fund Regulatory and Development Authority (PFRDA) is a defined contribution retirement plan. All Government employees joining after 1st January 2004 except armed forces must compulsorily invest in this scheme.

From 1st May 2009, NPS was made available to the private sector through the All Citizen Model. However, the plan did not gain popularity because of two primary reasons. Firstly, the working of the NPS was complex and therefore, most investors failed to understand how it worked. Secondly, the designated Point of Presence (POP) did not promote this scheme because it offered very low earning to them. The POPs were offered INR 20 per investor irrespective of the amount invested.


The contributions made to the NPS may be invested in equities, government securities, or corporate bonds. The PFRDA has appointed fund managers who offer these services to the subscribers. Investors may actively participate in asset allocation or opt for the auto investment mode where the fund manager makes investment decisions. Until recently, the fund managers received only INR 9 per INR 10 lacs being managed by them, which was why they were not forthcoming in offering superior services.

NPS fund managers

The regulator has appointed 3 fund managers namely LIC Pension, UTI Retirement Solutions, and SBI Pension for the Tier I government subscribers. Private sector personnel may choose among ICICI Prudential, SBI, DSP Blackrock, UTI, Reliance Capital, and Kotak Mahindra.

Tier II account holders may choose to avail services from six fund managers. These include ICICI Prudential Pension, UTI Retirement Solutions, DSP Blackrock, SBI Pension Funds, Reliance Capital Pension, and Kotak Mahindra Pension.

Government fund managers earn 0.0102% management fees while private sector service providers charge 0.25% fees. The management fees are similar for Tier I and Tier II accounts.

Investors must choose one of these fund managers at the time of opening the NPS account. They may determine their PRAN number status in case it has not been received. Permanent Retirement Account Number (PRAN) is unique and offers portability to the NPS account holders.

Asset classes and fund managers

The subscribers may invest the contributions in 3 asset classes; equity (E), government bonds (G), and debt instruments (C). The maximum allocation for E is limited to 50% of the invested amount. Investors who do not actively participate in the asset allocation may choose the auto mode. The funds under auto mode are invested in a Life Cycle Fund, which combines the 3 asset classes. Under this investment mode, the exposure to equities is reduced as the subscribers get older and near the retirement age.

Proposed modifications

The NPS is the lowest cost investment product available for retirement planning. The POPs initially received a maximum fee of INR 20 per subscriber. This was very low and deterred them from promoting the scheme even with the NPS tax benefit. 

The PFRDA has revised the fee offered to the non-government fund managers from 0.0009% to 0.25% of assets under management to ensure it is profitable for them. In addition, the fees payable to the POPs are now increased to INR 100 plus 0.25% of the investment amount. These modifications are expected to encourage POPs and fund managers to actively promote NPS.

Investments up to INR 1.5 lacs are deductible under section 80CCD (1) of the Income Tax Act. An additional INR 50,000 may be used as an NPS deduction under section 80CCD (1B). The higher tax benefits under the NPS may increase the number of subscribers from the private sector.

Retirement planning is important and NPS is made available as an alternative to the 401(K) plan available for the American employees. Unfortunately, a large number of Indians still do not plan for their retirement. Retirement planning is important to ensure individuals are able to sustain their present lifestyles even after retirement. Using a pension plan calculator to determine the amount they would get during the post-retirement years will be beneficial.


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