PFRDA to finalise guaranteed plan with minimum return by FY21 end

Regulator to raise cap on fee of fund managers; AUM of pension funds increases by 35% to Rs 5.5 trillion

The pension fund regulator will finalise a guaranteed product, which will assure minimum return, by the end of this financial year.  Besides, it is likely to raise the cap on the fee of pension fund managers from one basis point of asset under management (AUM) at present which will allow more managers to come in. 

"We are forming a committee very shortly. During this financial year we will formulate a product and then we will give it to the board for approval and then launch it," Pension Fund Regulatory and Development Authority (PFRDA) chairman Supratim Bandyopadhyay told reporters through a virtual press conference. 

He said assured minimum schemes in the insurance and mutual funds sectors have not done very well. 

"Whatever guaranteed products were there in the insurance sector were withdrawn because it was felt that giving guarantee for a long period of time may not be in the interests of the organisation. Sebi also does not really encourage any guaranteed product," Bandyopadhyay said. 

 

However, it will be introduced since it is part of  the PFRDA Act, said.

"The moment you give a guarantee, capital adequacy requirements for fund managers go up. Currently, it is absolutely mark to market, we are not facing any investment risks on ourselves. But the moment you give guarantee and markets move down, obviously fund managers will have to bring in additional capital. So, actuarial inputs are necessary.  Not only capital requirements, there are going to be different charge structures,  there has to be a separate guarantee fee. That also we have to decide, what should be the ideal guarantee fee," the regulator said. 

On increasing a cap on the fee of pension fund managers, Bandhyopadhyay said,"Our board has approved formation of a committee to recommend a cap on fees. It has people from outside too such as the mutual fund industry. We are expecting a report some time next week and by the second or third week of November the board will approve these rates.'

After that, PFRDA will issue requests for proposals for new fund managers by early December. 

"Currently, fund managers charge very small fees. It is only one basis point of AUM. We are assessing what it should be. It should not be too much too, but it should be that much to ensure that fund managers have the best infrastructure, IT backbone, research capabilities which will sustain the returns in the long run. We keep pension a low cost product," he said. 

Citing an example he said, mutual funds have a fund total expense ratio and Sebi is putting a cap on it depending on fund size. Mutual funds are free to charge fund management fees. "That is much higher at 10-15 per cent even for a liquid mutual fund or index fund which is a passive kind of fund," he said.  

Bandyopadhyay said PFRDA need not give actuarial evaluation of NPS as was pointed out by the Comptroller and Auditor General of India (CAG) since NPS currently does not have any guaranteed product. Once this product is launched, then evaluation would become necessary. For Atal Pension Yojna (APY) actuarial valuation is being given. 

Pension fund managers under PFRDA have a combined AUM of Rs 5.5 trillion as on October 10, a growth of 35 per cent year-on-year. "We saw almost 31 per cent growth in AUM since March 31 despite volatile markets," he said. 

 

He said the target is to take the AUM to close to Rs 6 trillion by end March next year. For the current fiscal, Bandyopadhyay expects the AUM to continue clocking at least 30 per cent compounded growth as was seen in recent years.

Average scheme under PFRDA has given 9.72 per cent returns on equity as on October 9 for 11 years of investment, 10.31 per cent return on corporate bonds, 10.13 per cent on g-sec, 9.9 per cent on central government scheme, and 9.83 per cent on state government scheme. 

However, due to volatility in the markets, the equity returns will be less at 4-5 per cent for the current year, he said clarifying that pension funds are long term investment so one should look at returns on a longer term horizon. 

The regulator said PFRDA has given its suggestions on universal pension scheme and auto enrolment to the finance ministry. 

The plan will target employees in the unorganised sector as well as micro, small businesses which have less than 20 people each. 

"We are working with the ministry whether we can bring them under NPS or if they are not able to contribute whether we can bring them under APY. There has to be some compulsion on employers that they are auto enrolled. Employers can also contribute a little bit," he said. 

Bandhyopadhyay said systematic withdrawal plan (SwP) will not be rolled out in near future, but PFRDA is seriously looking at it. 

"The current corpus structure will ensure SwP for 10-15 years, but you require them for a longer period. This is a challenge," he said.