The National Pension System (NPS) is set to get more pension fund managers, but at a higher fund management cost. On 17 September, the Pension Fund Regulatory and Development Authority (PFRDA) invited fresh bids for managing funds for the private sector NPS.
According to the request for proposal, 10 fund managers will be selected; one of these will be a government company. Currently, the private sector NPS has eight fund managers. The selection process will be through an auction system in which bids will be placed on the basis of fund management fee. But this time there is a change: instead of a race to the bottom to fix the cost, pension fund managers will bid within the ceiling of 0.1% or 10 basis points. PFRDA will then choose the 10 lowest bidders.
Fund managers will be registered for a period of 5 years.
Even at 0.1%, the fund managers are not too happy as they find the costs unsustainable. Currently, the fund management charge is 0.01% or one basis point. This too was decided through auction, in 2014.
PFRDA was notified as a statutory authority in 2014. Subsequently, it came out with regulations on various aspects of NPS and regulations for pension fund managers were notified in 2015. To be compliant with the new rules, the fund managers had to either renew their licences or bid again. Fresh bids were called. According to Hemant Contractor, PFRDA’s chairman, the aim behind increasing the number of fund managers was to increase participation, which would in turn drive competition as business grew.
This time, eligible companies will be judged on technical factors (management quality, investment capabilities and track record) and commercial parameters (fund management fee). Those that score at least 70% on the technical front will qualify for commercial bids.
Bidders will be ranked based on their fund management charge bids. In case of a tie (suppose 20 firms bid 0.1%), PFRDA will take the decision based on the technical bids. Also, if no state-run fund manager is selected, then the Authority will only allow nine fund managers and one slot will remain reserved for a state-run entity. These fund mangers will be allowed to operate at the bid price, so, unlike the current system where the fund management fee is a flat 0.01% across all the seven fund mangers, the new ones will charge a different fee. NPS, however, allows you to change your pension fund manager once every year.
Change in auction method
This is the third auction for the seven-year-old NPS. In 2009, when NPS was launched for the private sector, it was decided that fund managers would be selected through an auction to ensure that NPS was a least-cost product. In the first round the fund management charge was 0.0009% and five fund managers agreed to match this. But one folded up as sustainability became a challenge. The second round of auction was in 2014, in which the lowest bid was at 0.01% and eight fund managers were selected.
However, according to the G.N. Bajpai committee, which was set up to review the investment framework, the bidding process was unviable as it created a race to the bottom with uneconomical bids. It recommended a fixed- and variable-fee model. “The recommendations were based on the fact that pension fund managers would also be involved in marketing NPS. So, a variable fee could be levied depending on the volumes generated. The government, however, is not keen to allow them to market NPS, and as such, fixed plus variable fee doesn’t work,” said Contractor.
The cap of 0.1% has not gone down well. “In the last auction, the second lowest bid was 0.15%. So, the rationale behind capping the fee at 0.1% is unclear,” said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd. “Each pension fund manager will need AUM (assets under management) of at least Rs 4,000 crore at a fee of 0.1%, because Rs 4 crore is the cost of running the company alone,” he added. According to Contractor the fee was arrived at based on future projections. “We expect the business to take off with the e-NPS facility, the extra tax break given and also the possibility that the government sector NPS will open up to even the private pension fund managers to manage. It is with these projections that we arrived at a cap of 0.1%,” said Contractor.
But the industry doesn’t seem enthused. “The licences of government sector pension fund managers have expired and their selection is long overdue. Ideally, the government NPS should have been opened up first, because the private sector AUM is only about 10% of the total. Given such low levels of NPS penetration in the private sector, a fund management charge of 0.1% is not attractive,” said Shailendra Kumar, managing director and chief executive officer, SBI Pension Funds Pvt. Ltd.
For you, a fund management cap of 0.1% means that NPS will continue to be cost efficient given that insurance companies can charge up to 1.35% and mutual fund companies charge 1.25-1.5% as fund management charge within a total cost cap of 3%.
You can read the entire request for proposal here: http://bit.ly/2czMRsp.