Have you seen those old Hindi movies where the hero’s poor parents run from one desk to another to get their own provident fund money released. Very few people are even aware that you are allowed to withdraw money from your employee provident fund for specified purposes such as children’s marriage, house purchase and treatement of critical illness in the family. The exercise of this withdrawal right is hemmed in by many conditions. For example ,you have to prove that it is your child’s marriage by submitting a wedding invitation card. So if you were planning to fix the date of marriage only after funds are arranged by PF withdrawal you cant do that. You have to fix the marriage date first, print the wedding card and submit request for withdrawal to the PF office (alongwith perhaps the birth certificate of the child to prove that he/she is indeed your child) and hope to god that the money comes in time for you to make the necessary arrangements. Off course in these days of cheap online printing the smart guy who wants to withdraw money will just get a card printed and submit the application and then fix the marriage at his conveneience after receiving the money.
Employee Provident fund scheme has been criticised that it allows too many withdrawals and hence people end up with very little money in their provident fund accounts at the time when they retire. A lot of withdrawals happen when people change jobs. They lie in the withdrawal forms and dont get the monies transferred to the provident fund account at the new job . If despite the bureaucratic implementation of the withdrawal facilities the withdrawals are so high, it is actually a vote of no confidence in the scheme adminstration. Most such withdrawals may be misguided but they are also prompted because the scheme adminsitration is user unfriendly and also returns are just about okay. The EPF trustees have mulishly refused to invest any money in the equities market despite the good long term performance of the Indian equity markets.
Rules restricting withdrawal from a long term saving scheme are perfectly acceptable especially when contribution to such schemes is part funded by the government in the form of tax breaks. But whatever withdrawals are permitted should be adminstratively simple to implement. It is not right to assign highly detailed reasons and then making the subscriber jump through hoops to get access to his own money for such restricted withdrawal. Result – a lot of people withdraw completely when they get the chance (when they switch jobs for example) rather than justify the small withdrawals through elaborate documentation needs. The elaborate terms and conditions only encourages rent seeking behaviour from those who approve such requests.
NPS administration was designed in a modern way to avoid the mess that the Employee Provident Fund organisation found itself in. It has a cerntralised record keeping agency that has rolled out a fully computerised and online system with complete mobility. Changes such as change of employer, of the fund manager, scheme, etc. are easily available and the entire information and status is available online at all times. But the achille’s heel of any such system is the ease of withdrawal. Anybody who has tried to withdraw money from his employee provident fund account knows the pains that one has to go through for withdrawing your own money. In case of NPS the withdrawal is even more complicated since the current rules require compulsory purchase of an annuity from an approved annuity provider and only the balance is paid to the NPS subscriber. Since this is a long term investment scheme the number of withdrawals from the scheme have been few so far and are currently being handled manually. PFRDA has just put out a 21 page withdrawal system draft guidelines for public comments that clearly bring out the challenges of crafting a withdrawal mechanism even where the reasons for such withdrawal is not required to be validated. The passing of the PFRDA act has now bought in fresh challanges. One of the changes that have been bought in the law is the like EPF, limited withdrawals will be allowed for pre-sepcified reasons such as higher education or marriage of children, buying a house,for treatment of critical illness , etc. Now the NPS withdrawal system will also have to validate the reasons for such withdrawals. PFRDA had put out a draft for public opinion on how this specific reason withdrawals will be treated. The draft primarily dealt with the reasons, frequency of allowed withdrawals and the limits for such withdrawal. Once this is finailsed a much larger question will be how these reasons will be validated and whether the fund adminstration or the CRA will be involved in validating these reasons. It is by humble suggestion that whilst the rules can provide for documents to be submitted alongwith the application for withdrawal it should basically rely on the statement of the subscriber and not set up a huge bureaucratic set up to validate the reasons. After all the subscriber is not withdrawing from the government treasury and can withdraw only limited amounts from his pension corpus. In the process of curbing unjustified withdrawals the adminstration of the scheme should not be made cumbersome and unfriendly.
There is still no clarity on how NPS will provide for the voluntary guaranteed return product mandated under the Act. Hopefully that will also not lead to any adminstration issues.
The negative image of Employee provident Fund is entirely due to inefificent and unfriendly administartion which is only partly due to the cumbersome and arcane rules governing this scheme. Hopefully PFRDA will learn from the experience and avoid falling into the same trap.