If it wasn't for the government announcement that brought tax benefits to the National Pension System (NPS), 2018 would have been rather lacklustre. The pension fund managers who have been waiting for over two years for fresh licences-the bid for new licences happened in September 2016-continue to be disappointed. Pension fund managers are operating on a wafer-thin cost of 0.01%-one basis point-as the fund management fee and re-issuance of licences would have allowed them to increase their fee tenfold to 0.1% as was decided in the last auction.
But the year ended on a positive note as NPS got a huge push in the form of tax breaks. Earlier this month, the government made maturity corpus from NPS completely tax-free. Being a retirement product, NPS locks in at least 40% of your maturity corpus into buying an annuity product that pays regular income for life. The remaining-up to 60%-can be taken tax-free. Until now, you had to pay taxes on 20% of the maturity corpus making only 40% of the corpus tax-free; now the entire 60% you withdraw will be tax-free.
The annuity income though continues to be taxable in your hands and this is why financial planners advise caution when investing in NPS: you lock 40% of your money to annuitise on maturity at the then prevailing rate and the income that you bring home is taxable. For now, the industry is cheering the announcement. “The entire 60% permitted withdrawal will be made tax-free from the next financial year and this has to be the biggest event of 2018 that will positively impact NPS because now NPS is comparable to long-term products like PPF and EPF. In fact, we are the cheapest market-linked pension product and this I expect will result in NPS gaining traction in the future,” said Kumar Sharadindu, managing director and chief executive officer, SBI Pension Funds Pvt. Ltd. “Other changes pertain to government sector NPS that also allows choice of private pension fund managers among other things,” he added.
The other significant change in NPS was allowing higher equity exposure. Subscribers can now put 75% of their money in equity funds if they are below 50 years of age. However, once they touch 50 years of age, this equity exposure tapers down gradually to 50% by retirement. In 2016, Pfrda increased the limit on equity investment to 75% only in the life-cycle based funds that invest your money in a pre-determined asset allocation.
The year also saw further tweaks to the investment guidelines when it capped mutual fund investment to 5% to manage the equity corpus and also barred companies from levying an investment fee on this corpus. The rationale is to encourage fund managers to manage their own money instead of outsourcing it.
For EPFO, 2018 was about pushing ahead the agenda of digitisation on the backbone of Aadhaar KYC authentication so that EPF accounts could finally become portable and completely de-linked from employers. Traditionally, EPFO has relied on employers to authenticate information of the employees. So at the time of withdrawal or transferring your EPF money from one employer to another, you needed the employer to sign-off on the papers as the employees had a unique EPF number under the employer and this changed every time the employee changed jobs. But with the introduction of Universal Account Number (UAN), every employee now has a unique account number that's portable across jobs. But the system still needs KYC authentication that puts you back to the mercy of the employer, but with e-KYC through Aadhaar, dependence on the employer ended completely.
In fact, it was for this purpose that EPFO last year launched a composite claim form that allowed employees to withdraw and transfer EPF money online without the interface of the employer. Here the only pre-requisite was that the employee needed to have Aadhaar and a bank account-linked UAN. Further, this year it also allowed employees to take an advance of 75% from their EPF balance in case of unemployment for a month-earlier, the rules only allowed complete withdrawal if the employee has been unemployed for over two months.
In order to ensure that all UANs were seeded with Aadhaar, EPFO made it mandatory for employers to seed Aadhaar number of their employees with the respective UAN, but this hit a roadblock after the Supreme Court order on Aadhaar. “EPFO made it mandatory for employers to seed Aadhaar of their employees with the respective UANs and employers who didn't were penalised. In fact, 2018 primarily was about EPFO attempt to achieve its objective of being digitized with the help of UAN and Aadhaar authentication. Although after the court order, EPFO did ease off temporarily on the penalties but employers continue to be demanded (with penalties) to seed Aadhaar,” said Rituparna Chakraborty, executive vice-president and co-founder, Teamlease Services.
From a customer standpoint, the process of digitisation may bring convenience. However, a big miss in 2018 for EPFO is that the authority is yet to implement the methodology to realise investments in equity; remember they are allowed to invest up to 15% of the incremental corpus in equities through ETFs.
For the pension sector, 2018 did see some positive reforms, but it would also be remembered for the big misses.