 "India retirement system ranks last in the global pension index")
The Pension Fund Regulatory and Development Authority (PFRDA) is likely to appoint fund managers for an open-ended term, against a three-year tenure now, to manage the Rs 1 lakh crore corpus under the national pension system (NPS). The move is expected to instill confidence in pension fund managers to take long-term investment decisions, which would deliver greater returns to subscribers.
The pension fund regulator will invite bids for pension fund managers (PFMs) in a month or two, based on a 'significantly flexible regulation'. "We have tried to keep the regulation as flexible as possible. The basic idea is to give confidence to the fund managers and ensure greater returns for the subscribers," said R V Verma, member (finance), PFRDA. The proposal will be taken up with the PFRDA board for final approval.
The proposal will give confidence to PFMs to develop their own business model and decide on the investment they need to put in staffing and infrastructure. Besides, subscribers will feel confident that the PFM handling their fund will not get de-registered in three years.
"The registration clause of three to five years gives out a confused signal; so it is best to keep it open. If they know they are here for a long haul, they will be in a better position to take a call on break-even, and what the profitability projection looks like. The regulation provides the stability in terms of their tenure and gives confidence to PFMs to invest in infrastructure," said Verma.
The PFMs will be on board till they continue to comply with the regulation. However, in case of non-compliance, they could be de-registered. Once more private subscribers come on board, more PFMs could be added to the pool to manage the larger assets under management (AUM).
"We will evaluate the performance of the PFMs from time to time. The PFMs would be registered for several years till we feel they are not conforming to our regulation based on which they could be de-registered," Verma added.
Currently, eight PFMs manage private-sector funds and only three run by state-owned financial institutions are allowed to manage central and state government funds.
SBI Pension Funds Pvt Ltd, UTI Retirement Solutions Ltd, and LIC Pension Fund Ltd manage the government corpus. They also manage the private-sector corpus along with ICICI Prudential Pension Fund Management Co Ltd, Kotak Mahindra Pension Fund Ltd, HDFC Pension Management Co Ltd, Reliance Capital Pension Fund Ltd and the pension fund incorporated by Birla Sun Life Insurance Co Ltd.
The latest round of bids could see more PFMs coming on board, against only eight now. PFRDA is considering a common uniform request for proposal (RFP) for both the government and the private sector if the Centre's approval comes before the bids are announced.
"We could have more PFMs this time. It could even be a common uniform RFP for all, if we have the government's decision by then. It will provide economies of scale as the AUM will spread to all PFMs," said Verma.
Of the Rs 1 lakh crore AUM of NPS, 90 per cent falls under the central and state government schemes.
The government is considering a proposal to allow private fund managers to manage funds of government employees as well. If approved, government employees will be given a choice to opt for private- or state-owned PFMs.
The seventh pay commission headed by A K Mathur recommended 'exempt exempt exempt' (EEE) status for NPS, arguing NPS should be on par with the employees' provident fund scheme in terms of tax-free withdrawal to provide a level-playing field. "EEE will be a game-changer for NPS. It will result in a substantial increase in the AUM with more private subscribers coming on board," said Verma.
For the past five years, while the Employees' Provident Fund Organisation has been giving a return of 8.25-9.5 per cent to its subscribers, NPS has given a return of 9.2 per cent and NPS Lite has given a compounded annual growth return of 9.68 per cent.
The pension regulator is also pushing a proposal to allow state government pension managers to invest half the funds in equity against a 15 per cent limit now. The government is yet to take a final call on that.
