It has been a while since I updated about the National Pension Scheme. But believe me, you didn't lose anything. As usual, government and their policies takes time to move and reach out to public. The movement is very slow in putting all the things in place and setup for enduser investing. I see lot of blogs than lastyear with more details especially many compliants about the way it is being handled.

With all the initial hype and great interest from NRI's, we expected the NPS would be up and running efficiently by now with more marketing from POC's and banks. But thats not truth, things are moving in snail fast. Anyway, here are some information, links and forms which you can go through

One good news, many banks which are declared as Points of Presence (POP) are setting up centers to support this scheme and slowly jumping in the band wagon. Their current target is focused mainly on citizens of India living in India and not many banks have good information about how to NRI's.

One bank which I just came across being named among POP's for NPS is focusing on Gulf/Middle East NRI  community is South Indian Bank. The SIB claims to be the largest service provider for the scheme, having the highest number of authorised branches for offering services under the NPS. You can learn more about their service by visiting their website at SIB.  Other banks who are named as POP's are also offer NPS and accept contributions are listed below:

Allahabad Bank,
Axis Bank Ltd,
Bajaj Allianz General Insurance Co Ltd,
Central Bank of India (CBI),
Citibank,
Computer Age Management Services Private Ltd,
ICICI Bank Ltd, IDBI Bank Ltd,
IL&FS Securities Services Ltd,
Kotak Mahindra Bank Ltd,
Life Insurance Corporation of India,
Oriental Bank of Commerce,
Reliance Capital Ltd,
State Bank of Bikaner&Jaipur,
State Bank of Hyderabad,
State Bank of India,
State Bank of Indore,
State Bank of Mysore,
State Bank of Patiala,
State Bank of Travancore,
Union Bank of India and
UTI Asset Management Company Ltd

Click here to see the detail list of branches in various cities. Also here is the registration form to register with POP.

Here are few Articles I came across which might interest your on this topic.

Details about South India Bank and NPS at thepeninsulaqatar.com

Reasons why NPS is not growing as expected at Business-standard.com

Questions&Answer about NPS economytimes.com

NPS not Cheap by businesspandit.com

ICICI NPS FAQ at ICICI.com

To conclude, it will take more time to get much more clearance on the process and availability of the scheme for NRI's more easily. Please continue the research and you are welcome to share any good information here. I will also keep updating on this topic when I hear any thing new so keep checking.

There have been some developments in the Indian investment scenario in the past couple of weeks that can be tagged good, bad and ugly from the investors’ perspective. Take a look.

The Good: Investing in Indian Mutual Funds (MF) just got cheaper. SEBI (Securities and Exchange Board of India) has scrapped the entry loads the MF were charging the investors towards remuneration of the intermediaries selling the scheme. The load was charged at a fixed percentage of the invested amount by the MF and was passed on fully or partially to the intermediary. This had commoditized the MF distribution activity with everyone receiving the same remuneration irrespective of the advice and service rendered.

Now the investor has the option to decide on the remuneration that he feels fit based on the intermediary’s service and advice quality. This has kicked up quite a storm among the distributor community which is understandable since they now have to negotiate and collect their remuneration directly from the investor. Though this is a welcome move which gives the final say to the investor, this move may well push the distributors to sell other competing financial products like Unit Linked Insurance Plan (ULIP) which offer similar investment avenues but a higher remuneration of even up to 50%. Small investors may be left in the cold as distributors concentrate on the HNI. It remains to be seen if the Indian investor community is mature enough to pay for advice as they are used to receiving it free so far, though the quality left a lot to be desired.

Indian regulations have recently been favorably benchmarked to world standards, but this move might just be ahead of time as the MF penetration is less than 10% among the Indian households. The MF concept has to be sold to the rural and semi-urban population which has a high comfort level with bank deposits, gold and property. The distributor community may not take the pain of educating the investors and this could affect the MF penetration outside the major cities.

But on the other side, this will shake up the so called advisors and consultants who were merely pushing products.  The really client-centric advisors and financial planners having a higher level of knowledge and skill to guide the investor with need-based approach should have nothing much to worry except adapting to the new business model. Lets hope this move achieves the intended purpose without any adverse side effects.

The bad: A lot was expected from the budget that the Indian government presented on the 6th July, but eventually turned out to be damp squib for the investors. The government had received a very favorable mandate not seen in the last two decades and did not depend on the left parties for its survival. The investors expected big bang reforms from the government and the stock market had run up on these expectations. But not much of the expectations fructified thus puncturing the optimism. To rub slat on the wound, the fiscal deficit projected by the government could head up to 12% of the GDP fuelling worries of rise in interest rates and crowding out private investors in the credit market. There is also the downgrading of the sovereign rating looming large. Let’s hope the Indian government pulls up its socks in due course and does justice to the huge expectations.

The ugly: The huge interest that the NPS (New Pension Scheme) generated could well evaporate as the government has not given the favorable tax treatment on par with other retirement products like PPF, EPF etc. This means that the investment returns will be taxed on maturity thus lowering the attractiveness of this excellent product. The response so far has not been anything to write home about with few hundred accounts having been opened and a few lakhs of rupees as contributions. The absence of any paid distribution channel would mean the entire onus of promoting the product and creating awareness would lie on the regulator, PFRDA.  We can just hope that the Indian government doesn’t throw the baby out with the bath water.

NPS was launched in the year 2004 by the Indian government as a defined contribution pension system. All employees who joined the Indian government service from 2004 come under this scheme. The previous defined benefit pension system for government employees is a huge financial burden, which the government wanted get relieved of gradually.

NPS is now being made available to the common public from May 2009. Any one can avail himself or herself of this scheme.

THE SCHEME

It is a centrally operated portable pension scheme. Initially there are 23 Points of Presence (POP) consisting of banks and other financial institutions, who act as the front end interface with the public. These POP facilitate account opening and other transactions. NSDL (National Securities Depository Limited) is the Central Record keeping Agency (CRA) and there are 6 fund managers, who will manage the funds. You may open an Individual Retirement Account (IRA) with any of the POP and you will be allotted a unique account number valid for life. So even if you change employer or place of residence, you may continue to operate the same account.

You have the option of contributing monthly or quarterly, but a minimum of 4 contributions in a year is mandatory to inculcate the regular saving habit. There are 3 fund options namely E (Equity), C (Corporate bonds) and G (Government bonds) and you may choose any or a combination of these options to deploy your funds. There is also a default “auto choice” fund which would be a lifecycle fund and the asset allocation would be adjusted according to your age. The equity exposure will be 60% till age 35 after which it will reduce by 3% every year till it reaches zero by age 55. You have the choice of selecting your fund manager and the CRA would transfer your funds to the desired manager.

Initially the NAV (Net Asset Value) will be declared once in a year and you would have the option of changing your fund manager only once a year. The performance of the fund managers will be reviewed every 3 years and replaced if necessary.

The tier 1 account is purely a retirement fund with no withdrawals permitted till age 60. But in case of a critical illness or for the purpose of buying a house, withdrawal is permitted. At the age of 60, you may opt to withdraw up to 60% of the fund as a lump sum and buy an annuity with the rest. There is also a proposed tier 2 account likely to be launched at a later date which would act as a normal investment account, permitting investments and withdrawals at will. But you need to have a tier 1 account if you desire to open a tier 2 account.

Fees and Charges

Account opening charge: Rs.50 per account

Annual maintenance charge: Rs.350 per annum which will gradually reduce to Rs.250 as the number of accounts increases to 30 lakhs.

Transaction charge: Rs.10 per transaction which will gradually reduce to Rs.6 as the number of accounts increases to 30 lakhs.

Fund management charge: 0.0009% per annum on the fund value.
 
Open to NRI

NPS is open to NRI who continue to hold Indian passport. The contribution should be in Indian rupee and the scheme is non-repatriable.

The positives of the scheme

Simple: Once an account is opened, you may continue to contribute till you reach retirement.

Portable: You need not open a fresh account every time you switch employment or residence unlike the present EPF (Employee Provident Fund)

Low cost: NPS offers an extremely low cost retirement plan when compared to the other alternatives. The significance of lower cost will be felt when compounded over a long period of say 15 or 20 years. The following illustration will drive home the benefit of low cost.

Consider the case of an investor who invests Rs.5000 per month for 20 years. With an assumed pre-expense return of 10%, the amount he would receive under NPS and any alternate retirement plan that has a fund management charge of 1% would be:

Tax treatment: The returns are fully taxable unlike EPF and PPF (Public Provident Fund) where the returns are tax free. This obviously looks to be an error and does not sound logical because all similar investment vehicles have to be given the same tax treatment and let’s hope that this would be set right in due course.

Disclosure: Initially the NAV would be declared annually so as to minimize churn between fund managers. Hopefully the disclosure is made more frequently over time enabling better fund manager assessment.
 
What should you do?

Certainly NPS is a good alternative to the investment schemes available right now in India and merits consideration. But stick to your present investment plans for now till there is more clarity on the scheme and the initial hiccups are overcome. I shall update the details once the scheme is up and running.

Check our latest update on this topic posted on 4/30/2009.

Any more questions on this topic, please don't hesitate to ask at our new Q&A section,  Ask All About Money or new website JustAskNRI.com.