Fund houses have been complaining about the low fees of the New Pension Scheme (NPS) for some time. While the Pension Fund Regulatory and Development Authority (PFRDA) raised the annual NPS fund management charges from 0.0009 per cent to 0.25 per cent last month, IDFC pulled out of the scheme by letting its contract expire.
While the low fee can be justified from the perspective that fund managers are expected to manage a huge corpus when more companies join NPS, the assets under management – total of Rs 23,500 including that of government employees – are still not very attractive. As on October 30, IDFC was managing just Rs 15-16 crore.
Its performance was not spectacular, either. IDFC investors got least returns in the Tier -1 category at 9.59 per cent in the G category, 12.13 per cent in C and 14.08 per cent (UTI and Reliance gave lower returns) in E categories. Its investors will now be moved to SBI Pension Fund or they can switch to any other existing fund manager of their choice.
In terms of cost, a mutual fund manager earns significantly more – between 1.8 per cent and 2.8 per cent. So, on a corpus of Rs 10 lakh, an NPS manager earns Rs 2,500 whereas a mutual fund manager (diversified equity fund) earns Rs 18,000 to Rs 28,000. Insurance fund managers get somewhere in between at Rs 7,500-Rs 13,500 (0.75 -1.35 per cent). But in case of the latter, there are commissions in the early years which are deducted from the premium, thereby reducing the investible amount significantly.
SBI, ICICI Prudential Pension Fund, Kotak Pension Fund, Reliance Pension Fund and UTI Retirement Solutions are the existing NPS fund managers. DSP BlackRock has joined the list recently. LIC has also renewed its term, but only to manage funds of government employees.
“We still feel that the revised pension fund fee, that is, up to 25 basis points, is low. However, going ahead, I am sure there will be an upward movement in the fees, which will benefit all pension funds and it will also help in taking this product to the masses ,” says Balram Bhagat, chief executive at UTI Retirement Solutions.
While cost has been a sore point with fund managers, many argue that an equity fund manager managing NPS money does not have much to do. “The highest equity exposure that can be taken is 50 per cent and that too, in index funds. So, fund managers have little to do, in terms of active fund management,” says the former chief executive officer of a fund house.
Yes, proper debt fund management will improve returns by a good two to three per cent, which will have a significant impact over a 20-30-year period. But in the early years, when an investor feels the need to put money in equities aggressively, this product does not allow him to do so.
It is important equity investments can be made more aggressive, which will help fund managers promote the product. But the downside of equities is worrying. It’s doubtful whether the government will be keen to expose employees’ retirement corpus to equities.