More pension fund managers, higher fees on the anvil for NPS subscribers

Soon, your National Pension System (NPS) investments will attract higher fund management fees, up from one basis point currently.  

The Pension Fund Regulatory and Development Authority (PFRDA) has proposed four charge slabs linked to assets under management (AUM). This is part of its request for proposal (RFP) floated on December 23, inviting applications from prospective sponsors for pension funds under the NPS.

The investment management fee can be a maximum of 0.09 percent for AUM up to Rs 10,000 crore, and 0.06 percent for AUM between Rs 10,001 crore and Rs 50,000 crore (see table). Beyond Rs 1.5 lakh crore, the charge will be 0.03 percent, which is also the lower cap. That is, when the prospective sponsors for pension funds submit their bids, the investment management fee quoted cannot be lower than 0.03 percent in any of the slabs.

“The applicant or bidder can quote and charge a lower slab-wise fee within the limit…subject to a lower cap of 0.03 percent for each slab,” stated the RFP.

This will include all transaction-related charges except brokerage and custodian charges, which will be 0.03 percent for equity transactions. “The expense ratio going up is not a matter of concern as the increase is marginal. Besides, it is still much lower than that of, say, mutual funds or life insurance policies,” said Mrin Agarwal, Founder, Finsafe.

This has been a long-standing demand from pension fund managers who have argued that the current expense ratio of 0.01 percent, which also includes the fees to be paid to intermediaries, is too low.

“The charges were expected to go up. At the moment, even brokerage had to be paid out from the one basis point that we were allowed to charge as expense ratio. It’s a win-win for pension fund managers as well as investors. Pension fund managers will be able to invest more and spruce up their infrastructure to provide better services, which will be in the interest of subscribers,” said Sumit Shukla, CEO, HDFC Pension Fund.

Financial planners, too, believe that an increase in fees was due to ensure that the fund management business would be sustainable. “If a pension fund manager has to manage the funds professionally, people and resources will be required and these entail expenses. If the fee is not attractive enough, they will not commit good quality resources. They have to be appropriately compensated for their efforts. From subscribers’ perspective, the charges are still attractive – the initial rates were not sustainable,” said Suresh Sadagopan, Founder, Ladder7 Financial Advisories.

In addition, you will be able to choose from a larger number of pension fund managers, up from the current seven. UTI Retirement Solutions, SBI Pension Fund, LIC Pension Fund, HDFC Pension Fund, ICICI Prudential Pension Fund, Kotak Pension Fund, and Aditya Birla Sun Life Pension Fund provide fund management services at present.

These pension fund managers, too, will have to submit their applications once again.

Among other criteria, the sponsor of a pension fund should have at least five years’ experience of fund management in equity as well as debt market. It has to be engaged in financial business regulated by any of the financial sector regulators, with minimum net worth of Rs 50 crore, out of which Rs 25 crore has to be the sponsor’s capital.

The last date for submission of bids is January 21, 2021.

However, not all industry-watchers are enthused about more players in the space. “Most large fund managers are already on board. More fund managers need not necessarily add value for subscribers. Many find choosing a pension fund manager difficult, and more options could only add to the confusion,” points out Agarwal.