The pension regulator is planning a Minimum Assured Returns Scheme for customers with a lower appetite for risk. In an interaction with Moneycontrol, Supratim Bandyopadhyay, Chairman, Pension Fund Regulatory and Development Authority (PFRDA), said that the idea is to have a separate scheme that can offer a guaranteed minimum rate of return.
He added that the scheme is under development and PFRDA would float a Request-for-Proposal (RFP) to choose actuarial experts for the initiative. Currently, the National Pension System (NPS) give returns annually, based on prevailing market conditions.
“We hope to float the RFP by January end. When it comes to pension fund managers, giving assured minimum returns means that the excess amount will have to be paid by the PFMs. Hence, their capital adequacy will be increased to Rs 50 crore for this purpose,” he added.
For instance, if there is an assured return of 2 percent and an NPS scheme is only able to generate 1.5 percent return, the excess 0.5 percent will have to be paid by the PFM.
Eleven years since the NPS was opened to all sections of the public (2009), the NPS has offered returns of about 10.75 percent despite having strict investment regulations, said the PFRDA chairman.
Hunt for new PFMs
The pension regulator is also in the process of appointing new PFMs to manage the NPS corpus. The RFP for this was issued on December 23 and firms have been given one month to submit bids.
Bandyopadhyay said that PFRDA will not be limiting the number of PFMs in the sector. He added that the regulator is hopeful of finalising the PFMs by the end of this financial year (March 31, 2021).
Currently, LIC Pension Fund, SBI Pension Funds and UTI Retirement Solutions are the pension fund managers for the public sector whereas for the private sector, apart from these three, there are four others: HDFC Pension Management, ICICI Prudential Pension Fund Management, Kotak Mahindra Pension Fund and Aditya Birla Sun Life Pension Management.
Systematic withdrawal plan
Under NPS, the pension regulator is planning a new system for a systematic withdrawal plan (SWPs) or payout within the funds. This would give additional options to subscribers since these individuals can decide whether to opt for annuity plans or for SWPs.
Bandyopadhyay said that SWPs will need actuarial inputs in the context of mortality and life expectancy.
“We had a meeting with the pension advisory committee in December and are working on this plan. We would like to get the SWPs up and running in the next 4-5 months,” he added.
Budget expectations
PFRDA has sought parity in tax exemption on NPS contributions by employers, irrespective of whether it is by the central government or other sectors.
From April 1, 2019, the government contribution (employer’s contribution) in NPS will rise to 14 percent (from 10 percent) of the salary while employees pay 10 percent.
Subsequently, Section 80CCD(2) of the Income Tax Act was amended to increase the tax exemption contribution to 14 percent.
But except the Central government, the exemption limit remains at 10 percent of salary for others such as state-owned entities and private sector entities. PFRDA wants parity in tax exemption for all categories.
Another item on the budget wishlist, according to Bandyopadhyay, is an increase in the NPS tax exemption limit from Rs 50,000 to Rs 1 lakh.
At present, investment up to Rs 50,000 in the NPS is tax exempt under Section 80CCD (1B) of the Income Tax Act. This is in addition to the Rs 1.5 lakh tax exemption under Section 80C.
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