PFRDA studies proposal to allow pension fund managers to provide annuity services

Pension Fund Regulatory and Development Authority (PFRDA) is looking into a proposal to allow pension fund managers (PFM) also manage annuity services. Currently, the job of a PFM ends after the retirement of a subscriber and thereafter, an annuity service provider takes over.

The move may attract more companies offering the service.

In an interaction with Moneycontrol, Supratim Bandyopadhyay, whole-time member (finance), PFRDA, said the proposal is in its initial stages.

"We are seeing if a PFM can also manage the cash-flow post-retirement and help an individual allocate funds in an annuity so that he/she gets a consistent regular return," he added.

This would be applicable for both the National Pension Scheme (NPS) and the Atal Pension Yojana (APY).

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

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At the time of retirement, 60 percent of the corpus can be withdrawn while 40 percent has to be used to purchase an annuity product.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.

Bandyopadhyay explained that in the case of APY as well, they have received a similar suggestion.

"This will mean that the structure of PFMs may undergo a change and their capital requirement may also go up. This is because they will undertake some risk. Till now there were only managing funds. If this proposal goes through, then they (PFMs) will also take risk of managing cash flow in such a way that the returns they provide on annuities is better than what annuity service providers offer," he added.

APY is a guaranteed pension scheme where individuals get between Rs 1,000-5,000 monthly pension based on a fixed contribution. NPS, on the other hand, is a voluntary, defined contribution retirement savings scheme where individuals can choose which instruments they wish to invest into.

On one hand, while annuity services may see a change, on the other new PFMs may also enter the system.

Bandyopadhyay said that they will be floating new tenders for selection of PFMs in the next couple of months.

"We are awaiting clarification on foreign direct investment limit in this sector. Post this, the tenders will be issued. This will not only help increase the PFM remunerations but also encourage other large corporate groups to enter this sector," he said.

PFMs only earn 0.01 percent or 1 paisa for every Rs 100 of funds they manage. This has made sourcing new business unviable.

As far as subscribers are concerned, PFRDA is looking to have 24 million subscribers in NPS and APY put together by FY20 end. Bandyopadhyay said that they are looking to add seven million new APY subscribers this year.
On the NPS front, he said the target is to reach out to young professionals in the age group of 22-25 years and enable them to buy NPS as soon as they get their first jobs.

The total AUM of NPS as of September 30 was Rs 3.62 lakh crore.

Recently, overseas citizens of India had also been given permission to invest in the NPS scheme.