After having been written off as a failure, the New Pension System is in the midst of a complete overhaul. Under its second chairman, Yogesh Agarwal, NPS regulator PFRDA (Pension Fund Regulatory and Development Authority) is well on its way to fixing the flaws that had made the NPS a non-starter. However, the ultimate goal of the NPS - that of creating a retirement benefit system that can help every Indian - will be met only if the government lets it become an alternative for the EPF.
As the PFRDA chairman described to me last week, there's now full recognition that there were deep flaws in the original structure and no realistic business model was possible for various participants for either the distributors or the pension fund managers. The distributors (mostly banks) had to contend with very low fees which made it impossible not to make a loss on the NPS. And the fund managers have to contend with very low fees produced by an auction process along with a short three-year terms, which precludes taking a long-term view of the business.
The PFRDA has changed the distributors' fee from Rs 20 per transaction to 0.25% and is also working towards changing the fund managers' deal when the term ends. These measures will help but they are unlikely to solve the basic problem. A low-cost, sensibly-run savings and retirement scheme cannot compete on equal terms with commercial alternatives because the latter will always have more money to spend on marketing and sales. The only logical solution is to make the NPS a permissible substitute (and eventually a complete replacement) for the EPF.
The structure of the NPS, in terms of returns, service quality, transparency, as well the government's implicit liability is infinitely better than the EPF. It's only when that happens will the NPS be able to realise its full potential.