NPS, the quietest pension system in the world.

The National Pension System manages, at the time of writing, roughly thirteen lakh crore rupees on behalf of about seven crore subscribers. It is one of the largest defined-contribution pension systems in the world, and certainly the largest about which the country's financial press writes the least. There are good reasons for both numbers.

The system was created by the Pension Fund Regulatory and Development Authority Act, passed in 2013 but operational, in various forms, since 2004. It began as a mandatory replacement for the old defined-benefit pension that the central government had paid its civil servants for half a century. It opened to all citizens in 2009. Since then, it has grown in the way that pension systems do — slowly, and then, after a decade, suddenly.

The two accounts

The NPS has two accounts. Tier-I is the pension account proper: contributions are locked until retirement, withdrawals are restricted, and at sixty per cent of the corpus may be taken as a tax-free lump sum while the remaining forty per cent must be used to purchase an annuity from a regulated insurer. Tier-II is the rarely-explained twin: a flexible, withdraw-any-time investment account that uses the same fund managers, the same expense ratios, and the same security baskets as Tier-I, but with no lock-in.

The expense ratio of an NPS pension fund is around four basis points. The cheapest mutual fund in the country charges thirty times more.

The structure of fees in the NPS is the most consequential, and the least discussed, thing about it. Pension fund managers — there are now eleven of them — are paid in basis points, single-digit. The custodian is paid in basis points. The Central Recordkeeping Agency is paid in flat charges of a few rupees per transaction. The total cost of the NPS to a subscriber, including all parties, is in low double-digit basis points. There is no other Indian retail investment product that is even comparable.

Why no one talks about it

The reason no one talks about the NPS is the same reason it works. There is no AMC marketing budget, no distributor commission, no incentive for any intermediary to sell it. The growth has come from employer mandates, from a thin tier of self-aware retail subscribers, and from the slow recognition that a pension system charging four basis points compounds, over thirty years, into a number that the rest of the industry cannot match. The country's most efficient investment product is invisible. The country's least efficient ones are on television.