Surviving Retirement

Published: Sep 10, 2009

The financial markets generate a lot of number on a per second basis. There are people who have made it a profession to convert this information into trends, buy-sell signals, charts and pivot tables. Over the last 18 years of financial journalism, I have realised that every number has a story to tell. And these numbers as a trend normally never lie. I am forever looking for these trends.

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.

(This story appears in the 11 September, 2009 issue of Forbes India. You can buy our tablet version from To visit our Archives, click here.)

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