In order to increase the footprint of the National Pension System (NPS), the Pension Fund Regulatory and Development Authority (PFRDA) has taken a number of measures, most of which kicked in from November. Mint Money brings you four changes that you need to take note of.
Increase in charges
You will now pay a fund management charge of up to 0.25% on your invested corpus. Earlier, this charge was just 0.0009%, which was decided by pension fund managers themselves. However, the cost being unsustainable for fund managers, the regulator has revised it.
But that’s not all: fund managers will also be allowed to participate in the marketing of NPS. In this regard, the fund managers can talk to the distributor belonging to its sponsor group or have a subsidiary.
The guidelines talk about maintaining strict firewalls between the two entities, but don’t allay fears of mis-selling. “Any financial product needs to be pushed and so you need incentives. We are at a nascent stage and yet the incentives are capped at 0.25%. PFMs have to manage their incentives within the overall cost of 0.25%. Compare this with other sectors. Insurance has been around for so long and yet the commissions are as high as 30-40%,” says Yogesh Agarwal, chairman, PFRDA.
Fund managers to have own index funds
By increasing the charges, PFRDA hopes that fund managers will get enough funds to manage their own index funds.
According to the investment guidelines of NPS, an investor can invest up to 50% in equity. These funds are to be invested in index funds that replicate the portfolio of either BSE Sensex or NSE Nifty. Index funds invest in securities in the same weightage, and in the same proportion, as the index.
But due to paucity of funds, fund managers have found it very difficult to have their own index fund and were allowed to invest in index funds of mutual fund companies. For you, it meant an added annual expense of up to 1.5% over the fund management charge of 0.0009%. But going forward this is set to change. “This was an interim arrangement. Fund managers did not get enough money and so we gave them this option. But with increase in the fund management charge and by allowing fund managers to also market NPS, we see no reason why they will still struggle for funds. So going forward, fund managers will need to manage their own index funds. This will be part of our management agreement,” says Agarwal.
PFRDA opened the doors to more fund managers in July. Now any financial institution that fits the eligibility criteria can be registered as a fund manager. Even the existing fund managers will need to apply afresh after their three-year contract expires. “The regulator has extended our contract till 31 December this year, but we have already begun with the process of registering afresh,” says Balram P. Bhagat, CEO and wholetime director, UTI Retirement Solutions Ltd. At present, there are five fund managers for the private sector: Reliance Capital Pension Fund Ltd, Kotak Mahindra Pension Fund Ltd, UTI Retirement Solutions Ltd, ICICI Prudential Pension Funds Management Co. Ltd and SBI Pension Funds Pvt. Ltd.
IDFC Pension out, DSP BlackRock in
Despite the changes, fund managers are finding it difficult to remain afloat. IDFC Pension Fund Management Co. Ltd, after serving as a fund manager for three years pulled out of NPS last month. “They terminated their contract on 30 October,” confirmed Agarwal.
In the interim, investors in pension funds of IDFC Pension Fund have been shifted to SBI Pension Funds, but they are free to choose their fund manager. “It is quite unfortunate that they decided to terminate their contract at a time we increased the fund management fee and allowed fund managers to market NPS and get funds. If they had been struggling for funds, now was the time to really get funds,” says Agarwal. Not only did the company suffer from paucity of funds, it also hasn’t performed well. The last one year return on corporate bonds has yielded only 1.67% as compared with an industry average of around 10%. The return on government securities, however, is the highest (see table).
PFRDA has already begun getting applications for fund managers. So far, they have approved DSP BlackRock Investment Managers Ltd. “We have got in-principle approval and we will now take steps to legally incorporate the entity. The pension market has to grow only because there is lack of social security for the unorganized sector. Even if you look at the organized sector, there is an EPFO (Employees’ Provident Fund Organization) product but NPS is superior. If certain things can be ironed out, such as taxation, then the product has a lot to offer,” says Pankaj Sharma, head (business development and risk management), DSP BlackRock.
DSP BlackRock is confident that NPS will take off. “A lot of education is required, efforts must also be made by pension fund managers to go to companies, give presentations to them and educate them about the benefits of giving the NPS option to their employees. We need to put in that effort but that is a choice made by every company,” says Sharma.
New scheme for private companies
For corporate entities wanting to invest in pension funds tailored for government employees, PFRDA has launched a new scheme called the corporate central government scheme (Corporate-CG scheme). The new scheme was launched to bring parity in fund management charges. This scheme will also charge a fund management charge of 0.25% instead of 0.0102% that government pension funds charge currently.
Companies can invest in NPS either by choosing private sector NPS or government NPS. Both the schemes have the same architecture and design, but differ in terms of investment pattern. Private NPS currently has three funds—asset class E that invests in equity, asset class C that invests in corporate bonds and asset class G that invests in government bonds. As per the investment norm, an investor is free to choose his asset allocation, but can’t put more than 50% in equities. Companies have the flexibility to choose the fund manager and investment funds for the employees or allow the employees to choose themselves.
In case of government NPS, there isn’t much of a choice in asset allocation. Once the company chooses the fund manager, the manager can allocate assets subject to a cap on each asset class—up to 55% in government securities, up to 40% in corporate bonds and up to 15% in equities. Note that while investment in equity in case of private NPS is only through index funds, the government scheme can invest in equity directly or through equity-linked mutual funds.
However, this is set to change. “We will bring the investment pattern of this scheme on par with private NPS so that they also invest through index funds,” says Agarwal.
Track this space to know how NPS will shape up in times to come.
With inputs from Kayezad E. Adajania
The regulator has been bringing about changes to make the pension product more popular in the market