The newly-appointed Pension Fund Regulatory and Development Authority (PFRDA) chairman, Supratim Bandyopadhyay, has a tough task on hand. Taking over the reins when there is a crisis of confidence in the markets, Bandyopadhyay needs to widen the reach of the NPS (national pension system) at a time when its tax benefits will no longer be available to investors who opt for the new income tax regime. And, what are his thoughts on the ever-growing clamour for increasing fund management and distribution charges of the NPS that for years have been a trickle? He speaks to Moneycontrol’s Preeti Kulkarni about how he aims to tackle some of these challenges.
Despite NPS being one of the best vehicles for many to plan for their retirement, it isn’t such a popular choice, apart from the tax breaks it offers. What are the key areas that you are focussing on, after taking over as the chairman?
We plan to focus on a couple of things. One, the smooth passage of the amendments to the PFRDA Act, which is in the process of being placed in the Parliament (this was announced by Finance Minister Nirmala Sitharaman as part of Union Budget 2020. Among other things, the amendments to the Act will facilitate separation of NPS trust for government employees from the PFRDA.) We are expecting it any day.
Then, there are aspects that we can act on even without the Act being amended. We are looking at issuing a fresh request for proposal (RFP) for pension fund managers. We want to increase the number of fund managers, if they wish to come and join us. Another important area that we are looking at is increasing the fund management charges, which are very low at present.
The current expense ratio that NPS funds charge subscribers is 0.01 per cent. Equity mutual funds can charge up to 2.25 percent while debt funds can charge up to two percent. What do you think should be the ideal fund management charge that NPS can charge?
There is no such range that we are looking at. We are doing an analysis. Not only local fund management charges, but we want to draw from the experience globally too. What kind of management style do they follow – active or passive? What are their charges? These are the questions our research will focus on.
On one hand, people may feel that the costs will go up. But to tell you very frankly, what is being charged now is just one basis point, which is too low. And ultimately, this is the only revenue stream for pension fund managers. Out of this, they have to meet the basic costs like brokerage charges, audit fees and everything else. They are left with a very small amount at the end of the year. To deliver a good return, you also need good people. If you want to hire professionals from the market, you have to give them market-related packages and put the best technology systems in place. That entails costs. The sponsors of the pension fund managers are supporting the pension funds in a big way. But, I strongly believe the charge structure has to change as quickly as possible.
Do you also intend to increase the commissions offered to the intermediaries? The low commission is one of the reasons why the NPS is not as popular as it could have been…
Two to three years ago, commissions to distribution channels were revised. But still, we feel that is needs a further relook to see what we can do about it.
How soon will we see all these changes being implemented?
As far as fund managers are concerned, we are looking at a change in the rules which guide foreign holding in pension funds. At present, it is decided that the foreign holding cap will be 49 per cent, which is in line with that of insurance companies. We will issue the detailed rules in consultation with the Ministry of Finance, which is taking our inputs. Once we get their approval, the RFP for fund managers can go through. Increasing the pension fund managers’ charges will also have to be part of the RFP. Other changes are basically internal, and may be rolled out in the next couple of months.
You mentioned that calculating the 49 per cent cap is an issue to be worked out…
Pension fund managers have a sponsor. The sponsor could have some foreign holding. So, what can be the extent of this indirect foreign holding (in the sponsor)? This is the calculation we are working out in consultation with the finance ministry. Once the ministry gives its approval, we will go ahead.
In the last one year in particular, a lot of retail investors have burnt their fingers in debt funds and bonds because of defaults, rating downgrades and other crises. How do you plan to address the concerns of those retail investors who might be concerned about their debt investments through NPS?
Yes, there have been some downgrades and this is part of investments. But fortunately, in the case of NPS, investments affected by downgrades and NPAs are under 0.5 per cent of the total AUM and we wish to keep it at that level. And in fact, last year, we have increased the government securities investment cap by five per cent points (from 50 to 55 per cent). There is no credit risk involved here. While there is interest rate risk, our fund managers are seasoned players and have good fund managers on board.
We have asked the pension fund managers to take enough care and do their own assessment too, instead of going only by the ratings. Second, we have prudential exposure norms. So, investments cannot breach certain limits prescribed. Even if there is a downgrade, the impact will be limited.
As retirement fund managers, the idea should be to give safety the top-most priority, then comes the return. So safety is the basic premise on which everyone will work and, at the same time, we will give market-linked returns. And we have given decent returns. In fact, our investment return is better than even employees’ provident fund (EPF) return in ten years between financial years 2008-09 and 2018-19.
As a regulator, what would you say to those people who are worried about investing in anything other than sovereign guarantee-backed fixed income instruments?
There is even a 100 per cent government securities option available. But it cuts both ways. If you put your money only in government securities, obviously your exposure will be safe, but in the long-term, your return may be lower compared to even a small exposure to equities. Even in NPS, in the last 10 years, equity has given more than 11.2 per cent return. Government securities have yielded 2 per cent point lower return. Now, somebody may still be ready to settle for this lower return, but the problem is that these 2 per cent points, over a period of 25 years, make a huge difference. But it's a call that the person has to take.
Also, in December, you had spoken about the possibility of allowing NPS subscribers to take the systematic withdrawal plan route instead of compulsory annuity purchase…
That is part of the amendment proposal that we have given.
There has been talk about getting a common regulator to regulate all pension products. What are the likely benefits of a unified regulator?
When you have a unified regulator, you will easily know where to go in case of a grievance. And for the regulatory body, it's easier to reach out to customers and also control all the intermediaries. It will help with the development of the market.
So, now, the government has to take a call, because some pension products are offered on the insurance platform and some through the mutual fund route. We have given a formal proposal, but we also understand that IRDAI have has been in existence for nearly 20 years and players such as the Life Insurance Corporation of India (LIC) have been around for decades. So, from a practical perspective, it is not something that can be done overnight. For the time being, we'll offer our own products.