## Tuesday, February 17, 2009

### Investment of NPS assets

PFRDA has released a committee report on investment of NPS assets. By and large, I agree with what's in the report. Updates: See Deepak Shenoy on one element of this (investment in corporate bonds). Financial Express has an editorial on this report, and Dhirendra Kumar weighs in on the NPS.

But on the larger scale of thinking about the evolution of NPS, things are unfortunately getting a bit messy. The original vision of NPS was a single pension system which would be used by civil servants and others in the economy, where there would be only one concept of an NPS account, and this would work identically regardless of the identity of the employer of the participant. However, what seems to be shaping up right now is that NPS has forked into two variants: a civil service variant (with one set of rules about investment and fund managers) and an other-employers variant (with another set of rules about investment and fund managers.

This induces three problems:

1. Fund managers manage smaller sums of money, and the NPS loses economies of scale.
2. When a civil servant switches to private employment or vice versa, special effort will have to be taken to design for easy portability across the transition.
3. Complexity goes up, which is bad at many levels. A key insight of the NPS is that a simple system will be understood by a large number of participants, regulatory staff, other government employees, etc. This will make the system work well. Simplicity of functionality of the NPS makes it easier and cheaper to build and run the central recordkeeping agency (CRA). Every wrinkle of complexity in the NPS does damage to simplicity, which was one of the core design goals of NPS.

Looking forward, PFRDA and MOF need to struggle to avoid the extent to which this diverges into two distinct pension systems. So far, the CRA is identical (which is good). The fund management has forked. The picture on the points of presence has yet to clarify. Over time, PFRDA and MOF need to bring these strands back together into a single unified and simple NPS. This is going to take special care and effort; it isn't going to happen by itself.

1. I agree Ajay. Its much more desirable to have a single national pension scheme. An identical scheme for civil servants and the rest of India would generate significant public confidence and serve as a powerful sales proposition for voluntary coverage. This would also help differentiate the NPS from any other voluntary retirement scheme.

Also, civil service NPS members will evolve as a powerful lobby that will have a direct incentive to ensure that the NPS delivers on its objectives. The benefits of any future improvements to the NPS for civil servants would then automatically flow to everyone else.

2. Can the PRAN number be like a social security number. Every citizen has one even though you maybe on welfare and have no retirement savings. Gautam a single NPS with the possibility of zero pension would I think be awesome. Could solve the unique national id problem ? Now that is wishful thinking.

3. ts much more desirable to have a single national pension scheme
Top Savings Plan

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