Regulator to invite bids next month, may allow 26% FDI.
After a four-year wait, the Pension Fund Regulatory and Development Authority (PFRDA) is ready to kick off the process to set up private pension funds so that salaried and non-salaried people can start investing April onwards.
The regulator will invite bids from prospective fund managers and applications for points of presence, or POPs, where money can be deposited, around mid-December. Sources involved with the exercise said PFRDA will announce the required norms by January 31.
“The idea is to complete the process by January 31, so that the fund managers can start operations from April 1,” a source close to the development told Business Standard.
The fund managers, who will have to sign an agreement with PFRDA since a Bill providing statutory backing to the regulator is pending in Parliament, will have to set up a separate asset management company to offer pension plans.
Foreign investors will be allowed to hold up to 26 per cent stake in these asset management companies for which the initial capital requirement will be Rs 10 crore.
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The number of fund managers that individuals can choose from is yet to be finalised, but sources indicated that up to six asset management companies may initially be allowed and the number will be expanded later.
“The regulator wants competition but does not intend to allow too many players so as not to confuse investors,” the source said.
The bids, which will focus on management fees, will be evaluated by a committee that PFRDA will set up. The regulator has also roped in consulting firm Mercer to evaluate the bids.
The three fund managers — Life Insurance Corporation, State Bank of India and UTI — which have bagged the mandate to manage the Centre’s contributory pension scheme will have to submit fresh bids if they are interested in managing the non-government pension business.
The fund managers, in turn, will offer five or six schemes each. These will vary from a scheme that allows risk-averse individuals to invest only in government securities to a debt-oriented option and a life-cycle plan where the investment pattern changes according to the investor’s age profile of the individual (for instance, there will an equity bias for someone in his late twenties or early thirties that will change to a debt-oriented plan by the time he turns, say, 55).
All the schemes will be approved by the regulator and will be common across asset management companies. Subscribers will have the option to change their fund manager and the investment option once a year, sources indicated.
An individual will have to mandatorily set aside at least 40 per cent of the maturity value of the scheme to buy annuities from an insurance company, that will yield a monthly income, and the remaining 60 per cent can be withdrawn.
Since pension plans face tax at the time of withdrawal, unlike many other long-term saving instruments, PFRDA has sought an exemption. Pending a decision, individuals have the option of investing the entire maturity value in annuities and avoid paying tax since this will not be treated as withdrawal, a source said.
| HOW PRIVATE PENSION FUNDS WILL WORK | ||
| HOW ARE THESE DIFFERENT FROM EPFO AND OTHER CURRENT PENSION PLANS? | ||
| Unlike EPFO, the pension plans will not be mandatory. At present, the only competing plans are offered by some insurance companies but these are mostly in the nature of annuities | ||
| WHAT RETURNS CAN I EXPECT? | ||
| The schemes will not offer assured returns. The experience with the contributory pension scheme for the central government employees who joined from January 1, 2004, shows that returns can be over 8 per cent | ||
| DO I GET A TAX BREAK? | ||
| Present norms mandate tax at the time of withdrawal but the pension regulator is seeking an amendment to the tax laws. The other option is to invest the entire maturity value in annuities and avoid paying tax | ||
| CAN I CHANGE MY FUND MANAGER? | ||
| Subscribers will be allowed to change not just the fund manager but also the investment pattern. | ||
| HOW WILL THE SCHEMES WORK? | ||
| Investors can go to the ‘points of presence’ like banks and select their fund manager and the scheme. They will receive a permanent retirement account number (PRAN) from the central record-keeping agency (CRA) that will make the scheme portable across jobs and geographies. If investors want to change the fund manager or the scheme, they will have to route the request through the CRA |
Details of the investment options and the investment pattern will be finalised once an expert committee headed by HDFC Chairman Deepak Parekh submits its report on November 30. The committee’s recommendations will also form the basis for deciding which scheme will be the default option – that is, the scheme that will automatically apply if the investor does not make a specific choice.
Unlike fund managers, the regulator is planning to involve as many banks and other intermediaries as POPs. The POPs have to be entities that are regulated by one of the financial sector regulators. So, a bank, an insurance company, or a mutual fund can be assigned the task for collecting money and PFRDA will provide them with the literature to market the plans.
Although the government and the regulator are also keen on involving the post offices as POPs, the postal department has not given its consent so far.