Market-linked assured returns pension plan runs into hurdles

Pension fund regulator PFRDA’s proposed Market-linked assured returns pension plan said to face opposition from RBI, Irdai, Sebi and fund managers


Photo: HT
Photo: HT

Mumbai: The Pension Fund Regulatory and Development Authority’s (PFRDA) proposal to offer minimum assured returns on market-linked pension plans is facing resistance from other financial regulators and fund managers, said three people with direct knowledge of the matter, including a PFRDA official.

The matter was discussed in the Financial Stability and Development Council (FSDC) meeting held on 17 April.

As a way out, the pension regulator has suggested an inter-regulatory committee to work out the modalities.

In 2016, based on a provision in the PFRDA Act 2013, the pension fund regulator had floated a proposal to have a market-linked pension product with a minimum assured return.

The Act says users of national pension scheme (NPS) seeking minimum assured returns, shall have an option to invest in minimum assured returns schemes and these schemes will need to be notified by PFRDA.

“The provision is to assuage the uncertainties of what a subscriber will get as pension in market-based instruments such as NPS. But PFRDA is facing resistance from fund managers and from other regulators,” said the first of the three persons cited above.

The regulators opposing the proposal are the banking regulator, the markets regulator and the insurance regulator.

The Reserve Bank of India (RBI) is against the proposal as it views any assured returns as debt security disguised as equity. Securities and Exchange Board of India (Sebi) is against the proposal as the liability of an assured return may fall on asset management companies (AMCs) that sponsor the pension funds.

Mint had reported that Sebi and PFRDA were at odds over the minimum assured returns pension plans. (bit.ly/2caWvmi)

While the PFRDA Act allows assured returns, there are restrictions in Sebi regulations.

“One of the modalities being considered for this product is to offer it as an annuity product but Irdai is not in favour,” said the second person.

Annuity is a form of insurance or investment entitling the investor to a series of annual sums. In India, annuity products are offered by insurance companies and regulated by the Insurance Regulatory and Development Authority of India (Irdai). 

While pension fund managers have agreed to launch such schemes, they have told the pension regulator that such a product would offer lower returns.

“The pension fund managers have communicated that a guarantee in such a market-linked instrument will compromise on returns, and they will need to pass on the cost to consumers,” said the second person.

There are eight fund managers currently managing pension assets. One is sponsored by a bank (State Bank of India), three by mutual fund houses (UTI Asset Management Co. Ltd, Kotak Mahindra Asset Management Ltd and Reliance Capital Asset Management Ltd) and four by insurance companies (Life Insurance Corp. of India, HDFC Standard Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd and Birla Sun Life Insurance Co Ltd).

“Any assured returns is step backwards for a sophisticated new age financial product such as NPS. A minimum guaranteed return product which has been spoken about in the PFRDA Act already exists as the Atal Pension Yojana, which is backed by the sovereign,” said Dhirendra Kumar, chief executive of mutual fund analytics firm Value Research Ltd.

“It is a tricky product. Minimum assured return will increase the acceptability and reach of NPS but passing on the costs of guarantee to customers may compromise returns,” said a PFRDA official who did not wish to be named. 

One of the products being considered is one that will protect the capital.

“A major portion of capital (investment by the subscriber) may be put in a seed fund, having a lock-in or major investment in debt securities,” said the PFRDA official.

Earlier the G.N. Bajpai committee had examined this minimum assured return plans. In its report in 2013, the panel had suggested the cost of the guarantee should be passed onto the consumers and that the regulator adopt a cautious approach as previous experiences in India with assured return products have failed. 

“It is feasible to have a capital protection product but would not be in the spirit of NPS. It would need to be a complete debt product. The returns are a function of interest rates and inflation which remain unpredictable so there could be a potential liability, a huge one, at a later stage,” said Kumar.

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