Opening the pension fund business to private fund managers will be among the biggest reforms in 2009. Pension Fund Regulatory and Development Authority Chairman D Swarup, who is in the midst of finalising the blueprint for all citizens to plan their retirement, spoke to Sidhartha about what lies ahead. Excerpts:
What is the time table for appointment of fund managers and finalising the points of presence so that investors start investing from April?
We are looking to complete the process of appointment of sponsors for the pension funds in about 4-5 weeks. They will then be given time to incorporate new companies, which should take around six weeks so that the fund management companies are in place by the middle of March.
They will get 2-3 weeks to put in place the required infrastructure to start operations from April 1, 2009. In the case of the points of presence, the process will be completed earlier as they do not need to set up separate companies. We are looking at banks and other entities that are regulated by any of the financial sector regulators. The entities should be such that they can electronically transfer the funds on a T+1 basis and they have to operate within the charges that are fixed by us.
What kind of charges will an investor have to pay till his investment matures?
In the short-term, the cost may appear to be high. But, it will not be as much as mutual funds where the costs add up to over 2 per cent. The all-in-cost will be less than 1 per cent in due course.
When is the committee headed by Deepak Parekh going to submit its report?
The report should be with us by mid-January and it will take us 2-3 weeks to finalise the guidelines.
How many investment options will be available to investors? Have you zeroed in on the lifecycle plan or 100 per cent investment in debt as the default option?
In addition to the 100 per cent debt option, there will be a default option in the form of a lifecycle plan, where the investment pattern changes according to the investor’s age. The default option will come into play when the investor does not choose an option himself. In addition, we are looking at two or three other options where the mix will vary from 10-15 per cent in favour of equity to 50-60 per cent equity investment, the remaining in fixed income instruments.
What is the advantage of having a lifecycle plan as the default option?
The advantage lies in the fact that the investment style automatically adjusts to one’s age profile and risk appetite associated with age.
More From This Section
Given the global crisis, do you expect a healthy response from international financial players, especially those who are not operating in India?
Earlier, some foreign funds had shown interest but some of them may have lost patience even before the present financial crisis. That may be due to the delay in the passage of the Bill. But we are confident that whoever is in India will respond. With 26 per cent foreign investment and joint ventures already in place for insurance or mutual funds, there are many players who are interested.
Why did you decide on including indirect investment in the 26 per cent foreign investment ceiling when the rules were changed for insurance?
The foreign investment ceiling is in the government’s policy domain. Perhaps, they want to go by the experience in the insurance sector. There is a possibility that the foreign investment ceiling will be enhanced in due course since the Bill to raise the cap to 49 per cent for the insurance sector has been introduced in the Parliament.
What is the USP of the scheme?
One, there is flexibility that is not available with existing schemes. You can put in as much as you want and it does not have to be monthly, bi-monthly or quarterly. We will only fix a minimum amount for the year so that fixed costs, like maintaining an account with the central recordkeeping agency, are covered.
Two, there is portability, which is the biggest advantage since you can move from any location or job or change schemes. Three, there are many investment options and you decide how to invest. Four, the cost will be much less.
Five, there is transparency since we will give you an I-PIN, through which you can check your account regularly.
In the absence of tax benefits, the returns will be lower. Do you think that will deter investors?
The benefits under section 80C of the Income Tax Act are available. So, the investment will be part of the Rs 1 lakh limit. Where PPF scores is at the withdrawal stage, since under our scheme, you will have to pay tax on maturity. But we have approached the government to be treated on a par with PPF. We will push for it when the budget preparation starts.
What has been the experience with the NPS for government employees in terms of the asset under management and the returns available at present?
The funds of the central government employees alone are close to Rs 3,000 crore. While Rs 1,700 crore has already been transferred to UTI, LIC and SBI, the three existing fund managers, the remaining amount due on account of the sixth pay commission award will be handed over soon. Another Rs 3,000 crore will come from state governments which have decided to shift to the new pension scheme.
Six states, including Jharkhand, Bihar, Chattisgarh, Madhya Pradesh, Andhra Pradesh and Haryana have already signed an agreement with the CRA. The returns are better than the 8 per cent they were earning earlier.
Since insurance firms are already offering pension plans, how do you propose to regulate them?
Once the PFRDA Bill is passed, the pension schemes offered by existing players will be regulated. If the insurance companies want to offer NPS, they have to be successful in the bidding process. We will have to see how the schemes can be harmonised.
Insurance companies say your model does not help investors gain full knowledge about the products on offer. Is it a fair criticism?
No. We are giving a lot of emphasis on investor education. We will ssoon licence retirement advisors who will offer advice on pension products and how investors should go about it. There will be no conflict of interest for these advisors since they will not be linked to any company.