Pension fund regulator says will ensure fee structure benefits both customers, fund managers

The Pension Fund Regulatory and Development Authority (PFRDA) will soon bring out the request for proposal (RFP) to select new pension fund managers (PFMs) for the National Pension System (NPS).

In an interaction with Moneycontrol, Supratim Bandyopadhyay, Chairman PFRDA said there is a need to have a fine balance in the fund management fee for both PFMs and end customers.

“Nowhere in the world do fund managers operate at such a low fee. We will look into it and see that the fee is improved. Once we receive necessary guidelines from the finance ministry, the RFP will be presented to the PFRDA board and then released to the public,” he added.

Currently, PFMs only earn 1 paise for every Rs 100 of funds managed under NPS. This has made it an unviable business. However, the PFRDA chairman said the idea is to incentivise PFMs while ensuring that customers don’t end up paying a high fee.

Adding new PFMs into the system

Once the RFP is floated, aspirants can apply for entry as pension fund managers. Bandyopadhyay said at least three to four more PFMs could be part of the system.

“We would like to see more PFMs in the sector and strong financial sponsors with good track record should come into the pension fund management fold. More players would mean better fund management practices through increased competition,” he added.

Currently, there are three PFM for the government sector - LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions. In addition to them, private players include HDFC Pension Management, ICICI Prudential Pension Fund Management, Kotak Mahindra Pension Fund and Aditya Birla Sun Life Pension Management.

Growth in APY and contribution deferment due to Coronavirus

The flagship pension scheme of the government, Atal Pension Yojana (APY) has completed five years. PFRDA administers this scheme.

Bandyopadhyay explained that almost 7 million subscribers were enrolled under APY in FY20. As on May 9, 2020 when this scheme completed five years, the  total enrollments under APY stood at 22.3 million.

APY can be subscribed by any Indian citizen in the age group of 18-40 years having a bank account. This scheme provides a minimum guaranteed pension ranging from Rs 1000 to Rs 5000 on attaining 60 years of age. The amount of pension is guaranteed for a lifetime to spouse on the death of the subscriber and in the event of the death of both the subscriber and the spouse, entire pension corpus is paid to the nominee.

PFRDA has allowed deferment of contribution under APY by registered users till June 30. This is amidst the Coronavirus (COVID-19) outbreak.

“Banks had also requested some deferment since the direct benefit transfer amount was also going into the bank accounts. APY subscribers typically belong to the unorganised and need money for buying essentials. Hence, we deferred contributions until June 30. From July 1 to September 30, the contributions can be paid without being charged any penalty,” he added.

Defaults and asset classification

The PFRDA chairman said there could be some tweaks done in the asset classification norms for the pension sector.

“Reserve Bank of India (RBI) had given three-months relief for any possible defaults. We are also asking our PFMs whether there is any requirement to provide similar reprieve in case there is a default in debt payment obligations purely due to the COVID-19 outbreak,” he added.

In April 2020, RBI Governor Shaktikanta Das had said a standstill asset classification for standard accounts will be provided in case they avail the three-month term loan moratorium between March 1 and May 31.

On new tax regime impacting NPS enrollment

From FY21, there will be new tax regimes applicable. One will be the existing regime with all the deductions for payments like NPS, PF, insurance premium, home loan among others while the new tax regime will provide a lower rate of taxes but no deductions.

Bandyopadhyay said while the new tax regime would be beneficial for individuals not availing deductions, individuals already availing tax exemptions will stick to the old regime.

“In April 2020, we have seen a 40 percent growth in NPS enrollments driven by corporates. I don’t see the new tax regime impacting the numbers,” he added.

As on April 30, 2020, the total number of subscribers under NPS and Atal Pension Yojana crossed 34.6 million and the Asset under Management (AUM) has grown to Rs 4,33,555 crore. More than 6.8 million government employees have been enrolled under NPS and 22.60 lakhs subscribers have subscribed to NPS in the private sector with 7,616 entities registered as corporates.

Amendments in the PFRDA Act

The PFRDA Act is to be amended and the bill is to be presented before the Parliament for approval.

Bandyopadhyay said as part of the PFRDA Amendment Act, the pension body has suggested a proposal where PFMs could become annuity service providers.

“We have suggested that it could be like a systematic withdrawal plan. Because if you see the current annuity rates are coming down with the drop in interest rates. The rates stand at about 5.5-6 percent and nobody wants to get locked-in to this rate for their entire lifetime. The rates offered during accumulation phase of NPS are higher,” he added.

Pension fund managers collect the contributions of individuals and invest them into a range of instruments in the equity and debt segments. The idea is to have a diversified portfolio and offer risk-weighted returns to customers.

At the time of retirement, 60 percent of the corpus can be withdrawn while 40 percent has to be used to purchase an annuity product. Here, the PFMs have no role to play and annuity service providers come into the picture.

Currently, 12 life insurance companies including SBI Life, LIC, HDFC Life, ICICI Prudential Life, Edelweiss Tokio Life, Tata AIA Life and Max Life among others have been empanelled as annuity service providers.

If the PFMs are also allowed to provide annuity services, they will be responsible for managing the corpus post-retirement as well.