Tuesday, February 17, 2009

Investment of NPS assets

PFRDA has released a committee report on investment of NPS assets. By and large, I agree with what's in the report. Updates: See Deepak Shenoy on one element of this (investment in corporate bonds). Financial Express has an editorial on this report, and Dhirendra Kumar weighs in on the NPS.

But on the larger scale of thinking about the evolution of NPS, things are unfortunately getting a bit messy. The original vision of NPS was a single pension system which would be used by civil servants and others in the economy, where there would be only one concept of an NPS account, and this would work identically regardless of the identity of the employer of the participant. However, what seems to be shaping up right now is that NPS has forked into two variants: a civil service variant (with one set of rules about investment and fund managers) and an other-employers variant (with another set of rules about investment and fund managers.

This induces three problems:

1. Fund managers manage smaller sums of money, and the NPS loses economies of scale.
2. When a civil servant switches to private employment or vice versa, special effort will have to be taken to design for easy portability across the transition.
3. Complexity goes up, which is bad at many levels. A key insight of the NPS is that a simple system will be understood by a large number of participants, regulatory staff, other government employees, etc. This will make the system work well. Simplicity of functionality of the NPS makes it easier and cheaper to build and run the central recordkeeping agency (CRA). Every wrinkle of complexity in the NPS does damage to simplicity, which was one of the core design goals of NPS.

Looking forward, PFRDA and MOF need to struggle to avoid the extent to which this diverges into two distinct pension systems. So far, the CRA is identical (which is good). The fund management has forked. The picture on the points of presence has yet to clarify. Over time, PFRDA and MOF need to bring these strands back together into a single unified and simple NPS. This is going to take special care and effort; it isn't going to happen by itself.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.