Implementation of guaranteed pension product delayed as talks continue

Pension regulator wants to make the product attractive for subscribers, sources say

The introduction of the minimum assured return scheme (MARS) under the new pension system (NPS) is delayed as the Pension Fund Regulatory and Development Authority (PFRDA) wants more discussions on the product’s structure.

The pension product guarantees a minimum rate of return to subscribers was launched by September end last year but it was delayed till the beginning of Financial Year 2022-23 (FY23). One and a half months into FY3, the product is yet to see the light of the day.

Sources said unlike the current products under NPS, pension fund managers (PFMs) have to run market risks in MARS. In current products, subscribers run risks and not PFMs.

That is why the current requirement is just Rs 50 crore minimum net worth for PFMs, sources said, pointing out that the minimum capital requirement has to be higher for MARS.

PFMs, for current products, must have Rs 50 crore of net worth on the last day of each of the preceding five financial years, before they make applications to the PFRDA. Of that, at least Rs 25 crore should be capital.

Also, cost to subscribers will also be higher than that for other products and assured returns lower than market returns, sources said.  

Back to discussion table

PFRDA has appointed EY Actuarial Services as the consultant to suggest the structure of MARS. The PFRDA board posed a query as to how to make the product attractive to subscribers. And hence, the issue has again gone back to the discussion table, sources said.

They said the government has set up a committee to reform NPS for government employees and as such MARS may not be that relevant, at least for government employees in the changed circumstances.

The finance ministry has constituted a committee under the chairmanship of finance secretary T V Somanathan in this regard.

Sumit Shukla, MD and CEO of Axis Pension Fund, said PFMs will have to bear the risk of investment in case of MARS which has a guarantee. This is not the case with other pension products, he said, adding this may require enhanced minimum capital which will come at a cost for shareholders.

"If (the) structure of the product is such that it suits the enhanced minimum capital requirement, it will be a win-win for everyone," he said.

EY Actuarial Services had proposed six structures of MARS to the pension regulator. The regulator and pension fund managers chose only one of them.

Under the selected product, subscribers to MARS will have to stay invested for 10 years to claim the guaranteed return.

Also, a scheme would run for 10 years. This means that 10 years shall be minimum, as well as maximum, tenor of investments under the scheme.

Only those investors who remain invested for 10 years will get a guaranteed return and if the actual return falls below the assured amount, pension fund managers shall bridge the gap.

This was the one product that PFRDA was looking at for the launch. But now this has gone to the discussion table as cited above.

The regulator had earlier said more MARS products could also be launched later after assessing response to the 10-year product.

It is still being contemplated whether there will be one rate for guaranteed products or more than one. In case there is more than one, those providing higher guarantees are likely to have higher minimum capital requirements.

‘Guarantees have to be met’

Depending on the rate, fund managers can decide to put part of the scheme in equity as well, depending on the choice of subscriber.

“Whenever you are giving guarantees, those have to be met. For instance, if you are giving a guarantee of seven per cent, you put the money in the G-Sec giving you seven per cent. That is one way of doing it. Alternatively, if you don’t give a guarantee of seven per cent and rather give five per cent, then there is a difference between the two guarantees which allows you to take some risks. You take some risks and put some money in equity markets to see whether you get higher returns,” a source said.

If investment in equity works out, you get higher than even seven per cent returns or else five per cent is anyway guaranteed. If you want a guaranteed return product, you can’t get what you do in the pure equity market. That expectation is wrong, he said.

MARS assumes importance since a few state governments, such as Rajasthan, Chhattisgarh, Jharkhand and Himachal Pradesh have opted out of the NPS and embraced the old pension system (OPS); Punjab is considering the same.

The Centre had introduced the NPS mandatorily for its new employees from January 1, 2004, and subsequently, all states except West Bengal had adopted the NPS for their employees.

The pensioner gets assured benefits under the OPS, usually 50 per cent of his last-drawn basic salary and dearness relief, which is adjusted every six months in line with inflation. There are no assured benefits but defined contributions in NPS, at present. MARS tries to fill this gap in the NPS to an extent. The PFRDA Act talks of putting in place MARS, but it has not yet been launched. The Act had talked about introducing MARS by the end of 2013-14.