100% equity NPS schemes have attracted younger investors, says Sriram Iyer, MD & CEO, HDFC Pension Fund

National Pension System (NPS) has seen a host of changes in the past 12 months. While some, such as lowering the mandatory annuitisation limit, were long-awaited, others appear to have made what was meant to be a simple retirement scheme for lay investors, more complex...

By and large, the changes announced have been positive for the industry. It has been over a year since the Pension Fund Regulatory and Development Authority (PFRDA) Chairman Sivasubramanian Ramann took charge, and several of these changes are basis feedback from stakeholders across the NPS ecosystem, including subscribers. A key change is the reduction in compulsory annuitisation at retirement from 40% to 20% of the corpus. He has been encouraging the industry to shift focus from the government sector to the non-government sector. A lot of what he has done has resulted in expansion of the target segment of customers. If you had asked me a year-and-a-half ago if we could onboard two lakh Zomato delivery partners, my answer would have been, it’s difficult. Today, that’s happened. This entire gig economy, which employs around a crore people, is now looked at by the industry as an opportunity. The segment has taken off. At Zomato, there are a number of delivery agents who contribute Rs.2,000 a month or Rs.100 a week; amongst some of the other platform workers that we have onboarded, there are service professionals who contribute Rs.20,000 a month. We’ve been very focused on reaching out to every single platform company. Also in the works now is our outreach to Urban Company’s network for gig workers.

The corporate segment’s subscriber base has shown a sharp growth for the industry. What role has the tax benefit (where employers’ contribution up to 14% of the basic is tax-exempt) played in driving corporate NPS adoption?

It has always been there, but now that many people have switched to the new regime, they realise this is the only benefit available. And it makes a substantial difference. NPS is a very big beneficiary of all these developments that we have seen.

Mutual fund investors have Sebi-registered independent advisors (RIAs) who offer unbiased advice. But in the case of NPS, who can subscribers turn to for advice on investment strategies, especially in light of the changes in the last one year?

The entity that is supposed to be doing this task of educating customers is the Point of Presence (POP) – it is the responsibility of the POP/dis tributor community. That’s where we (HDFC Pension Fund also has a POP licence) are using a lot of technology to make sure that we are able to reach out to these customers. For a distributor of other financial instruments, there is a lot more complexity, compared to what we offer. You could argue that compared to the auto choice the end user had earlier, the increased number of choices has made it more confusing. But I don’t agree with that entirely. One of the things that we, as domain specialists, have to do is to ensure that people understand what it really means. Simplification is necessary, subscribers should not lose their way trying to figure out terminologies.

What patterns have you observed over the years in terms of subscribers’ investment behaviour and preferences?

Clearly, the new schemes (multi scheme framework) have sparked interest among people. Savvy investors are the first to latch on to the new investment bandwag on. And as you would expect, the 100% equity schemes have attracted a lot more interest among the younger crowd. You will see that people in the 25 to 35 age group are pretty much dominating the 100% equity schemes. Across pension fund managers, I would say 60-70% of all the money has gone to these funds.

How does the approach to NPS differ between government and private-sector employees?

In the case of government employees, given the fact that the choice has been made for them beforehand, everybody gets into the default scheme to begin with. The non-government sector is very different because it is voluntary. There are many companies where money was going to the superannuation scheme earlier, but is now getting redirected to NPS. We ourselves have, in the last two years, migrated around Rs.10,000 crore of AUM (assets under management) from superannuation to NPS.

Also, the age profile is very different. The new-age companies, especially the global capability centres (GCCs), have an average age of around 28-29 years. So how do you communicate the importance of retirement planning to somebody who is 25? For them, retirement is 35 years away. So how do I change the narrative with them? I feel this is where tech and AI-led communication can help us convey our message around the importance of starting early and investing consistently over the long-term.

How have NPS subscribers reacted to the subdued stock market performance in recent months, given that the equity component in NPS remains the key at traction?

That’s the beauty of this product. For example, corporate NPS contribution happens pre-salary (since the employer deducts the contribution before crediting the salary), just like employees’ provident fund (EPF). So, the likelihood of somebody stopping contributions is almost zero. We’ve not seen contributions being stopped —unlike SIPs (systematic investment plans) in mutual funds — despite all that’s happened in the last few months. These are all huge positives for this product. Put sim ply, there’s been no major shakeout.

There is a view that commissions for NPS intermediaries are still on the lower side despite revisions, especially when compared to other financial products. Do you feel the need for any changes in the policy?

There will always be a view that mutual funds and insurance, which are the other two big competing products, pay a lot more to a distributor than NPS. But one of the big objectives that NPS has is to help build a meaningful corpus over a long period of time, and cost leakages can significantly hamper this objective. So, 20 basis points (fee to intermediaries) is decent, in my opinion.

Beyond the 0.2% distribution fee, there are other ancillary benefits too. You will see that many banks, PSU as well as private sector banks have become a lot more aggressive on NPS because they all realise that as a product it is very sticky.

How do you look at the prospect of offering NPS through the GIFT City route?

It’s a great opportunity. We’re still at the early stages of evaluating it. HDFC International Life and Re, HDFC Life’s subsidiary, headquartered in Dubai International Financial Centre (UAE) has a branch office presence in GIFT City, and they’ve had a very good experience thus far. We have been discussing with them about their processes and experience. Potentially, it can be a great product for non-residents who live and work abroad but might choose to come back to India later. That cohort, will find it very attractive. We are looking at it very closely, but no decisions have been made yet.