Proposed minimum assured-return scheme may fetch 2-7% rate of return

Committee set up by pension regulator to consider suggestions made by consultant for scheme

A consultant has advised the pension regulator to offer a rate of return in the range of two to seven per cent for a proposed minimum guaranteed return scheme planned for launch later this year.

The scheme’s rates of return will depend on the kind of products offered, government sources told 'Business Standard'. E&Y Actuarial Services LLP, the consultant to the Pension Fund Regulatory and Development Authority (PFRDA), gave a few scenarios to the regulator on the minimum-assured return scheme.

The scenarios include whether there is single premium or regular premium, whether there is fixed guarantee or variable guarantee, whether the guarantee is linked to yield curve of bonds, movement of interest rates and whether they are linked to Nifty index, sources said.  

A committee set up by PFRDA will discuss the consultant’s suggestions sometime next month and give its report to the regulator. PFRDA board’s will then consider the report for approval.

While two per cent rate of return seems too low, seven per cent is not bad considering the returns offered by the National Pension System (NPS).

For instance, NPS Scheme A (Tier 1) has given rates of return in the range of 6.59 per cent to 9.71 per cent by seven different pension fund managers in around five-six years of their inception till July this year. This pension is primarily meant for retirement savings where the subscriber has made a minimum contribution of Rs 500 while opening the account. Under this scheme, the subscriber can withdraw up to 60 per cent of the total amount he has accumulated after his retirement. The remaining 40 per cent of the corpus is utilised to buy annuities to secure a regular monthly income source in the form of a pension.

On the other hand, the central government pension scheme has given 9.34 per cent to 9.59 per cent returns over 14 years of inception of the pension fund manager till July this year.

Returns on guaranteed return products have to be less than other products since the net asset value (NAV) of invested funds keeps changing depending on market behaviour.

"If you want a guaranteed return product, you can’t get what you get on other products. That expectation is wrong,” one of the sources said.

The PFRDA Act talks of putting in place minimum assured-return schemes but they have not been launched yet despite nine years have elapsed since the legislation was enacted in 2013. Before that the NPS was in place under an interim pension regulator since January 1, 2004. The Act talked about having these products by the end of 2013-14.

The Comptroller and Auditor General of India (CAG) had criticised the PFRDA for not rolling out such products in compliance with the PFRDA Act. It is not difficult to understand why this is so. Earlier, PFRDA chairman Supratim Bandyopadhyay had said such schemes in insurance and mutual funds had not done well.