Surviving Retirement

India’s most ambitious pension scheme has had a slow start. Giving it the power of 401(K) is the way to rev it up

Four months have passed since India’s New Pension Scheme was rolled out to the public with a big bang and what a whimper it has been. Only 1,500 people have joined the scheme and the corpus has touched a mere Rs. 2.5 crore. Early reports indicate three major shortcomings are holding back the scheme’s wider adoption: The tax liability on retirement, the limit of six in the choice of fund managers and the fact it is not an employer-sponsored scheme.

The clues to solving this impasse may lie in the world’s most popular word in the context of retirement planning: 401(K). It refers to specific section in the US Internal Revenue Code but has become popular across the world as the mnemonic for retirement and pension plans. Many countries have their own version of 401(K). Image: Vidyanand Kamat

In fact, the six fund managers appointed by the Indian government to manage NPS claim the new scheme is actually India’s own 401(K), but a scrutiny of its features shows otherwise. So, what if India were to go all the way and adopt 401(K), complete with all the features of the tried and tested scheme?

The simple answer: NPS will take off in a big way and become de rigueur for pension planning by Indian families.

The launch of NPS on May 1 this year was a major leap for India. “This scheme allows investors to take their retirement planning in their own hands and it has a lot of future,” says Naval Bir Kumar, managing director of IDFC mutual fund, one of the six fund managers. And then he adds his pitch, “In a way, it is totally like the 401(K) plan of the US.”

But a full-fledged 401(K) plan would be sponsored by employers. That is, a company would set up the retirement scheme for its employees by deferring the wages. This would be done based on an individual’s choice of schemes from a wide variety of investments and fund managers — literally hundreds — that 401(K) covers. Since NPS doesn’t have these features, it is not a 401(K) yet, says Mukul Asher, professor of public policy at National University of Singapore and who had been involved in pension policy discussions in India.

Remove these lacunae and the potential is immense. “If the NPS was really like the 401(K) plan, then in the next 10 years the NPS can easily grow to Rs. 500 billion [Rs. 50,000 crore] as distribution and advisory does not become an issue at all,” says Norman Sorensen, president and CEO of Principal International, the biggest 401(K) manager in the US. He says the scheme should not be limited to just six managers but opened up to the entire fund management industry.

India should also avoid the pitfalls of US 401(K) such as automatic enrollment and volatile employer contribution.

Perhaps, the biggest hurdle now is that NPS collections are not made from the salary slips of workers. The entire organised sector in India is hooked on to the employee provident fund (EPF) scheme. “For the NPS to come through the corporate, all the other benefits will have to go,” says Professor Asher.That suggestion may not find favour with employees, but opening up NPS to many more fund managers and corporate sponsors will certainly take it mainstream. And the government can add some zing with a full income tax exemption.

Source: http://business.in.com/article/what-if/surviving-retirement/3652/1

Commission+fee likely in insurance, for now

Commission-based and fee-based models are likely to run simultaneously for financial products, especially from the insurance industry, during the transition to the new regime.

While commission is associated with agents, the fee-based model is meant for financial advisors. The transition to the new revenue model may take 18 months, but could even stretch to 24 months.
A view would be taken on an alternate revenue model soon, D Swarup, chairman of the Pension Fund Regulatory and Development Authority, told reporters on Wednesday.He said the committee headed by him will submit its final recommendation to the government by the end ofthis month.
The committee won't fix a price band or a cap on the fees for financial advisors, Swarup said. When suggested that this could lead to arbitrariness, he said, "It's more arbitrary for the regulator or the government to fix a band or a cap."
Fees should be driven by market forces, like in the case of other sectors, he said. "Bilateral negotiation between consumers and advisors would determine the fee."The insurance industry has been up in arms since the government-appointed Swarup Committee released its draft report favouring a phasing out of agents' commissions by April 2011. The idea is to make insurance a no-load product by then, as the New Pension Scheme and mutual funds already are.
Indications are that only one revenue model would operate after the transition period.After an open-house discussion with industry representatives, including severe objections to the proposed model, the PFRDA chief's tilt was clearly towards a fee-based system.
"One has to take a view on whether the US model is for us to follow," Swarup said, while stating that the pure-fee model of Australia held much more promise than the combination of fee and commission-based models in the US. The UK is also in the process of shifting to a fee-based model.
Swarup likened the proposed reforms in the financial sector to those in the telecom industry. The telecom sector has registered significant growth in India, while tariffs have continuously decreased, he said, adding, the same is expected in the financial sector as well.
The final call on the committee's recommendations will be taken by the government and the financial sector regulators, including Irda. The Swarup Committee's mandate is to suggest measures to protect and educate investors, rather than looking at the business side of things, Swarup said. More than 90% people dealing in investment products do not know how mutual funds work, also very few know the difference between equity and debt, he pointed out.
Estimates suggest that there are 30 lakh advisors and sellers in the country, and the number of investors is more than 19 crore. In 2007-08, as much as Rs 14,704 crore was paid out as commission to agents. The objective behind bringing in a fee-based structure is to introduce transparency in the market for investors.

Source: http://www.dnaindia.com/money/report_commissionfee-likely-in-insurance-for-now_1288920