The NPS was meant to become the preferred way of saving for retirement. But a large part of the workforce is not even aware of its existence.

The National Pension System (NPS) is one of the most well-designed products for retirement planning. It was established to create a formal pension system for the unorganised workforce as well as shift the pension of government employees from defined benefit to defined contribution. The core of NPS is based on simple indexing strategies, low cost unbundled fund management, individual accounts, portability and centralised record keeping. One of the most important features of the product is that it can manage automated asset allocation for each individual account separately by starting with a higher allocation to equities and gradually shifting away to fixed income as one gets older.

In spite of such a potent product structure, NPS has not yet begun its true journey towards being the preferred pension system to the large unorganised workforce--almost 85% of the working population.

The cog in the wheel has been the distribution and operational structures where the rubber actually meets the road. The simple and rustic solution provided by many has been to increase the distribution commissions to make NPS compete with other products like insurance and mutual funds. However, such a solution would kill the core of NPS--which was the low cost design. If a pension system was constructed in that fashion, between 30% to 40% of lifetime savings would be transferred from workers to financial firms and distributors. This strikes at the very core of the pension reform process and ignores problems that other countries, which had not ring-fenced costs of pension funds, already exhibit.

Without making NPS a high cost structure, a seven step plan needs to be put into action to make it work.

Firstly, NPS should be made easily available. The current structure of POPs (Point of Presence) has clearly not worked. There are 64 POPs who have been enrolled by the Pension Fund Regulatory and Development Authority, but in reality, the availability at the branch level is abysmal. Most of the POPs allow NPS at select branches. As a starting point, every bank should offer at each branch and also on its website the facility to open an NPS account.

Secondly, the NPS account opening process itself has to be simpler. The account opening form is a long one with nuances. For example, for opening a Tier I account, bank details are optional, but mandatory if you also want a Tier II account. It is strange that the facility of an automatic debit to the bank account is not built into the form for a regular contribution scheme.

Thirdly, the operational wrinkles need to be ironed out. Cases of contributions taking around 7-10 days or sometimes even more to be credited can be seen. Access to an NPS account is still difficult for an individual. Seeing it grow and evaluating performance is still a chore. Not surprisingly, investors have been shying away as they see these issues as a product flaw which lowers their confidence in it.

Next are the taxation issues. At present, different retirement products have different tax treatment. PPF has an EEE (Exempt-Exempt Exempt) benefit. On the other hand, NPS continues to be on an EET basis and with mandatory part annuitisation. The previous budget document of Finance Minister Arun Jaitley had said mutual fund retirement plans will get the same tax benefits of approved pension plans which in effect was Section 80CCD. However, there has been a re-think on this and the final approval is of Sec 80C. Tax benefits should be aligned and made the same across all retirement products rather than creating this confusion of different tax benefits for different products.

Secondly, taxation benefits under Section 80CCD are currently more favourable for a salaried employee than a self-employed. A salaried employee gets tax deduction of up to 10% of his salary up to `1 lakh, on his subscriptions. His employer's contribution are tax deductible. So he gets a twin benefit. On the other hand, a self employed person gets tax benefit only for his own contribution of 10% of his income upto `1 lakh. Clearly the self-employed is at a disadvantage in a product designed for him. To remedy this bias, tax benefits for salaried and self-employed should be made the same.

Thirdly, given the importance of retirement savings and NPS, the finance minister should consider making Section 80CCD limit separate outside of the overall Section 80C limit or at least have a separate limit for retirement savings within the overall limit. This will give a big fillip to long term retirement savings and be a boost to NPS. Lastly there has to be efforts to remove the veil of secrecy around NPS. A survey found less than 1% of investors were even aware about NPS. There has to be a strong, effective advertising and media campaign along with social messaging about NPS. The cost of such a campaign can be limited to 5 bps of average assets and can be in-built as a cost to the NPS.