Fund managers queued up to grab a pie of the new pension scheme that opens for subscription tomorrow. But even before the scheme is launched, they are complaining of it being a loss-making business with the investment management fee fixed at 0.009 per cent.
While none of the six appointed fund managers have approached the Pension Fund Regulatory and Development Authority (PFRDA) for reviewing the fee structure, they are hoping that the regulator does it on its own.
The six fund managers – ICICI Prudential Pension Funds Management, IDFC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds and UTI Retirement Solutions – were selected on the basis of a technical evaluation, which was followed by a bidding process.
With UTI emerging as the lowest bidder, the others were asked to match the bid if they wanted to be a fund manager and the remaining five players grabbed the opportunity.
That was in February. Now, four of the six fund managers said the business would be a dead loss for them. The head of one of the appointed fund managers said that the salary alone would add up to Rs 1.5-2 crore. Another Rs 2.5 crore will be needed for administrative costs and the board and committee meetings. “Given the fee, we would earn Rs 90,000 if the assets under management were Rs 1,000 crore. So, each of us will need at least Rs 2,00,000 crore in funds under management to cover the cost,” the executive said.
According to preliminary estimates, the pension business could reach Rs 50,000 crore in five years and rise to Rs 2,00,000 by 2015, an ICICI Prudential executive said.
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The head of another pension fund management company said the low fee would not even cover the transaction costs and brokerage for selling and purchasing equity or government securities.
“We will buy government securities at auctions and will keep the portfolio churn at the lowest to ensure that costs do not shoot up. But returns will suffer,” added another fund manager.
Most fund managers agreed to the fee as they did not want to lose the first mover advantage. SBI and UTI decided to bid for the business as they had already set up companies with a capital base of Rs 10 crore.
These companies were managing the government pension corpus. The fund managers are hoping that the fees are reviewed after three years, or as soon as the PFRDA Bill is approved by Parliament to provide statutory backing to the regulator.
PFRDA Chairman D Swarup, however, said that with all the fund managers agreeing to match UTI’s bid, they have no reason to complain now.
However, not everybody is losing hope. A State Bank of India executive said it’s a long-term business and profit could be made only after a few years. Another executive at ICICI Prudential said the company was aware of the fact that it would not be able to cover the costs, at least in the initial years.
“But the good thing is that there are no marketing costs and operating costs are very low,” he said.
PLANNING FOR OLD AGE |
How will the new pension scheme, that is being launched on Friday, work |
Points of presence: 23 entities, mainly banks, have been registered to open your account and collect your subscription. They will charge a one-time account opening fee of Rs 40 and each time you invest, Rs 20 will be charged as the transaction fee. You have to make a contribution of at least Rs 6,000 a year, through four or more installments |
Central record keeping agency: National Securities Depository Ltd will track of your investment through a unique permanent retirement account number (PRAN). Along with a PRAN card, you will get a password to access your account over the phone (1800-222-0808) and an Internet password. It will cost Rs 50 to open your account and Rs 10 for every transaction. In addition, an account maintenance charge of Rs 350 will be levied. The charges will drop once one million subscribers enroll |
Custodian: Annually, Stock Holding Corporation of India will charge 0.0075 per cent of the asset value for the electronic segment. For physical settlement, the fees is 0.05 per cent a year, which will be deducted from the NAV |
Trustee bank: Bank of India will not levy any fee if you are in a location with an RBI office |
Fund manager: The six fund managers – UTI, SBI, IDFC, ICICI Prudential, Reliance Capital and Kotak Mahindra – will manage your funds for an investment management fee of 0.0009 per cent a year. You can invest up to 50 per cent in equities. If you can’t make up your mind, go for Auto Choice, where the debt-equity mix changes with age. The investment mix and the fund manager can be changed every May |
Annuity from an insurer: Once you are 60 years old, at least 40 per cent has to be invested in annuities, the rest can be withdrawn. The entire money has to be withdrawn by the time you are 70 |