People complain about getting low returns on annuity: PFRDA chairman

Supratim Bandyopadhyay, newly appointed chairman of the Pension Fund Regulatory and Development Authority (PFRDA), says two alternatives to the current mechanism of putting 60 per cent money into annuity are being worked out. He tells Indivjal Dhasmana there is no turf war between PFRDA and the Insurance Regulatory and Development Authority (Irdai). Edited excerpts:

Are you looking at any alternative to the existing mechanism of putting 40 per cent of fund of National Pension Scheme (NPS) subscribers at the time of withdrawal in annuity schemes?

We are looking at systematic withdrawal plans (SWPs) for NPS subscribers. This is at a nascent stage. It is part of proposed amendments to the PFRDA Act. That process is on. Rates of return on traditional annuity have been coming down drastically. At the age of 60 years when people normally retire, it varies between 6 and 6.2 per cent. Annuity is products where rates remain constant over the entire period once you opt for these products. No one wants to attach to annuity at 6-6.2 per cent rates over a long period of time because in between interest rates can go up. We are getting complaints from people who have retired or who are going to retire soon as to why returns are so low. 

Are you considering any other plans than SWPs?

We are calling them pension payouts. On retirement, subscribers can take 60 per cent of the fund. Forty per cent currently goes to insurance companies for annuity. In the new scheme, this would remain within the new pension system (NPS). That will be managed by fund managers and monthly pay out could be given from that. 

Is this different from SWPs?

It’s a bit different. We are currently looking at these two things. I cannot provide details right now because this is work in progress.

Will pay out from SWPs be taxable?

I think these would be similar to SWPs of mutual funds. These are currently taxable. Annuity was also anyway taxable. Once the plans are ready, we will get in touch with the CBDT to get clarity. 

There have been turf wars among PFRDA, Irdai, and Sebi over regulation of pension funds. Has it been resolved now?

Not so much with Sebi because its regulated pension plans are very less in number. Also, corpus under these plans is low — it is Rs 7,000-8,000 crore. Irdai had raised some points. It will regulate its superannuation funds, we will regulate our pension funds. These will be done parallelly. The pension market in India has a huge potential. There is a huge scope for everyone to work. 

At least from the PFRDA side, we can say that we don’t have any turf war with Irdai.

Is there any possibility that the returns under the new schemes would go down even below 6 per cent?

We are expecting better returns. Currently, when fund is with us and managed by fund managers, our average returns in the private sector is around 10 per cent. And this 10 per cent is not for one year, this is for the past 10 years. 

What is the need for separate trust to manage private sector funds that you talked about earlier?

Management process, asset allocation, and investment guidelines for the government sector is different. For instance, private sector employees can take up equity exposure up to 75 per cent of their funds, while the government employees can do it so up to 50 per cent only and that too in only through some plans. We thought why not to have a different trust. This is only an initial thought. To start with, we will only have a one trust -- NPS Trust. Simultaneously, we can think of separation of trusts. 

Could there be more than one trust as well?

There can be one trust for the central and state government employees and one for the private sector. We can think of a separate trust for Atal Pension Yojana subscribers. 

Are there plans to raise the cap for equity investments for the government employees to 75 per cent as well?

We will see. A very few government employees in fact have gone for 50 per cent equity exposure. Also, we have allowed government employees to choose private fund managers as well. Earlier, only SBI, UTI, and LIC could manage their funds. Of the funds of government employees, one third used to go to each of these public sector funds. Also, government employees can now choose only one fund managers. However, not many employees have gone for the new choices. 

The Budget didn’t accept PFRDA's demand to raise income tax exemption to Rs 1 lakh from the current Rs 50,000. Do you still think the NPS is an attractive product?

Income tax exemption up to Rs 50,000 is over and above Rs 1.5 lakh under the section 80 C of the Income Tax Act, that is still there. Secondly, entire 60 per cent of withdrawal is tax free. The NPS is a better product than any other superannuation product from tax point of view as well. From return perspective, we are much better. 

Is it better than Employees Provident Fund?

We have calculated that over the past 10-11 years, overall return under NPS is better than what EPF provided. EPF return is not a constant return. It has come down to 8.5 per cent this fiscal year from 8.65 per cent in the previous year. As the rates of interest in the country come down, EPF returns will also fall slowly. But ours is mark-to-market. Here reduction in the interest rates only helps our performance as asset value goes up. 

Earlier plans to allow transfer of funds from EPS to NPS has not come. Has it dented your subscriber base?

This provision is put under the social security Bill. However, those organisations which are not mandatorily required to put employees money in EPS are free to come under NPS. Those who are earning Rs 15,000 are not legally bound to be under EPS. We are seeing some of these organisations joining NPs. 

Do you have some numbers as to how many of such organisations have joined NPS?

I don't have the figures right now. But, I have figures for superannuation funds managed by insurance companies joining NPS. At least 26 large central public sector enterprises have shifted their superannuation funds from insurance companies to NPS.