A RECENT decision by the government to disallow all institutional investors from placing funds in the products offered by the National Savings Scheme has narrowed the scope for participation of the very people the schemes are supposed to exist for. It makes sense to stop participation in NSS schemes of those institutional investors who operate for profit, as has been done since 2003. But pension and provident funds are non-profit entities and operate for the benefit of retirees and salaried people, and these funds should continue to have access to NSS products, because the benefits they derive from this participation go directly to the owners of the funds, and not the institution. By closing the door on NSS products for pension and provident funds, the government has succumbed to the pressure of owners of mutual funds in particular, who have long lobbied to either be allowed to invest in NSS products, or to turn away pension and provident funds.

The arguments made over the years by the mutual funds are specious at best. For example, they argue that the participation of pension and provident funds in NSS products has a disruptive effect on the financial markets of the country. In order to for this argument to hold any merit, it will first need to be established that the returns enjoyed by investors in NSS products diverge significantly from the returns offered on government securities, whether treasury bills or Pakistan Investment Bonds. If there is significant variation in the yield curves of these instruments then an argument for ‘disruptive impact’ can potentially be made. At the moment, however, returns on NSS instruments closely track the returns on government securities. Mutual funds have also complained about the redemption feature in NSS instruments, describing it as a ‘free lunch’, but this feature is necessary in a country where funded pension schemes are rare and people have few options to build up long-term savings.

The sad fact here is that those who have lobbied to close the door on NSS products for pension and provident fund managers are actually the ones in search of a ‘free lunch’. Instead of improving the quality of the product offerings or sharing the returns they make by investing other people’s money, they are trying to grow the size of their market by shutting down other people’s access. The reality is that retirement funds are solidly risk averse, and if shut out of NSS, are more likely to expand their participation in auctions of government securities rather than play into the hands of the sharks that rule the private and for-profit financial markets of this country. The government has allowed itself to be played by vested interests in making this decision, to the detriment of salaried and retired individuals. The decision should be reversed.

Published in Dawn, July 4th, 2020