NPS - Well Begun but Half Done and two Game Changers
Sanjay Bhargava, May 19, 2009 – sanjaybhargava@yahoo.com
PFRDA opened NPS (New Pension Scheme) to all Indian citizens from May 1, 2009.
This note assumes that the reader is familiar with NPS so the basic details of the
scheme are not covered.
I believe that the scheme is fantastic and can benefit India and its citizens a lot. Why
do I say that? The reasons are outlined briefly below.
• For citizens who participate they will get old age security. Some people may
choose to invest more than they need for old age security but the primary
purpose of NPS is to provide old age security through cash flow which will
replace salary lost when one retires.
• The low cost, auto choice and passive investing make this excellent for
pensions when compared to competing private sector alternatives like ULIP’s
and pension plans offered primarily by insurance companies
• A comparison between NPS and PPF( Public Provident fund) of a driver who
currently earns Rs12000 ($400) ,is 29 with a salary growth of 5% annually
and saves 10% a month matched 10% by his employer shows with PPF the
corpus at age 60 is 37 lacs( $74,000) while with NPS it is 86 lacs ($ 171,000).
You can download the detailed spreadsheet from
http://www.slideshare.net/sbhargav1
• The requirement to use at least 40% to buy into an annuity is good as it will
guarantee some cash flow till death. I personally like the fact that withdrawals
and the pension get added to taxable income when withdrawn as income will
normally fall as one retires and the tax incidence on withdrawals and pensions
should not be high. Exemption ceilings will also rise.

• This is a defined contribution scheme and not a defined benefit scheme so it
will not create a problem for India like Social Security has created a problem
for USA
• NPS could build up to one of the largest pension corpuses in the world. At that
point the fund choices may be broadened so that some people who want to
take more risk can. It will also create long term domestic savings that can fund
infrastructure development
If all this is so good why do I say it is half done? I say that because
• PFRDA needs to evangelize this scheme so that everyone uses it. It will be a
national tragedy if in a few years we do not achieve close to 100% coverage
• The first pensions will be bought in 2014 and the annuities offered by
insurance companies must be attractive. Just as PFRDA has managed to
keep costs low for building the corpus it needs to get insurance companies to
compete and offer attractive pension schemes. This will not be easy as the
current insurance products such as term insurance in India are very
expensive and the industry is high agent commission based and not low cost
volume based.
I end this note with what I consider to be two game changers. The masses are not
going to use NPS easily as their orientation is short term and quite a few of them will
find it hard to be disciplined and put 10% of their salary into NPS. It will also be quite
difficult to convince all employers to match their employee’s contribution. Creating
awareness is going to take a lot of time and cost a lot of money. What then can be a
game changer? In my opinion the first game changer is a simple law which is
outlined below. With this the government achieves old age security for the entire
working class without spending a paisa.
• The law will make it mandatory for every employer to contribute at least Rs
500 ($10) per month for each employee whether employed full time or part
time. This is a little more than the minimum required by NPS. Market forces
will decide whether the employer keeps wages and bonuses same or reduces
them because of this contribution

The second game changer is to think of the PRAN number in NPS as a social
security number. Every US citizen and legal resident alien in the US has a social
security number even if they do not contribute to social security. A child in USA gets
a SSN when they are born. India has struggled with trying to get a unique national ID
for all its citizens and possibly legally resident aliens. It now even has a UIAI (Unique
Identification Authority of India) set up. If this concept is taken up it will also solve the
documentation problem to get an NPS account opened.
Are these two thoughts truly game changers? Will the UPA with the mandate it has
received act on this? I am hopeful that if these truly are game changers the
government will act within the first 100 days of taking office. The smart people who
designed NPS can figure out if there are any flaws in the game changers or better
ways to make the potential of NPS real.