NPS vs EPFO: Demystifying the pension debate

Sep 13 2013, 21:27 IST
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SummaryComparing NPS with EPS, to use an often used cliché, is like comparing an apple to an orange. EPF returns remain unaffected by market fluctuations, while the NAVs under NPS schemes fluctuate both ways

outscores most of the offering in the NPS basket. It would be essential for comparative purposes to convert the interest earnings of the EPF scheme into an NAV. When this NAV is compared with the declared NAV of various NPS schemes under tier-1 account, it emerges that only the three corporate schemes of NPS has performed better than EPF since May 2009 to September 6, 2013.

In NPS, life cycle approach has been adopted as default during the investment phase. This means that for a member who is below the age of 35 years and does not choose to actively manage his funds, the investments in his case would be governed by the default scheme. This default scheme mandates investment of 50% in equity (E) scheme, 30% in corporate (C) scheme and the balance 20% in government (G) scheme for a person below 35 years of age. The returns when calculated for a member who is below 35, under default scheme of NPS commencing from May 2009 and EPF/EPS for the same period, it is seen that the performance of EPF is better than all the other schemes run by different NPS fund managers. EPF has provided annual returns of 10.05% in comparison to 9.78% of the best performing ICICI Pension Fund Management Company among NPS fund managers.

There is another prevailing notion that the management charges of EPS are high. This is far from the truth, for while EPFO charges 1.10% of the wage from the employer for managing the EPF scheme, there is no charge on the member for managing the EPS scheme and also for disbursing pension to the pensioner.

In respect of NPS, there is a need to demystify the management charges which are actually borne by the subscribers.

NPS has adopted three different methods of charging its members. Points of presence (POP) charges are collected upfront from the member. Central record keeping agency (CRA) charges are through cancellation of units of the members. Portfolio management charges (PFM) and custodian charges are taken through NAV deduction. All these charges are only for the accumulation phase of the scheme. During payout, annuity service providers’ give returns on the corpus which is much lower than the market earnings.

The fixed cost of the NPS adds to a minimum of R500 only on account for POP and CRA charges which is more than 8% of the contribution for someone contributing R6,000 annually in NPS.

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