New Delhi: Life Insurance Corp., UTI Asset Management Co. Pvt. Ltd and State Bank of India have been picked as the three fund managers for the proposed new pension system that will cover 500,000 employees of the Centre and some state governments. The new pension scheme does not guarantee a fixed pension payment to retirees and applies to all government employees who joined on or after 1 January 2004. Other employees continue to be part of an older pension programme that guarantees a fixed payment.
An internal committee of the sector’s regulator, Pension Fund Regulatory and Development Authority (PFRDA) selected the three, leaving out IDBI Capital Market Services from the final shortlist of four entities.
The governing board of PFRDA has to approve the choices of the internal committee, a process which is expected to be completed in the next four weeks. The new pension system is likely to go on stream by the end of the current fiscal, said a finance ministry official, who did not wish to be identified.
PFRDA has already appointed National Securities Depository Ltd (NSDL) to maintain the records of the new pension system. NSDL is currently awaiting a clearance from stock market regulator the Securities and Exchange Board of India, under whose purview it comes. Once NSDL gets this approval, it will have up to six months to build the record keeping systems.
The new pension system is likely to start with a corpus of over Rs2,000 crore, said D. Swarup, chairman of PFRDA.
Nineteen of India’s 29 states have signed on for the new pension system. Some of the state governments have not yet transferred data on the number of employees and the corpus that will be transferred to the new pension system, said the finance ministry official. Once all the state governments transfer data, the corpus and the number of people in the new pension system would be higher than Rs2,000 crore and 500,000 respectively.
The highlight of the scheme is that it does not guarantee a fixed pension in the way the current system does. Government employees will have to contribute a fixed portion of their monthly income and the pension would be contingent on the performance of the fund over each employee’s working life.
Employees of an earlier vintage are guaranteed a pension equal to 50% of the average of the last ten months’ salary they drew. The total expenditure of the Central government on pension payments to its retired employees has risen from Rs3,272 crore in 1990-91 to Rs28,963 crore in 2005-06.
The new pension system will offer its customers two investment options: a fund that invests only in government securities and another fund which can invest up to 15% of its corpus in equities.
PFRDA has ruled out investing in individual shares under the equity option—the funds can only be parked in index funds.
PFRDA has not yet disclosed the details about the maximum management fees the fund managers can charge, but the fees are likely to play a critical role in determining the final returns as the investible corpus is likely to be locked in over a couple of decades.
“It (pension fund managers’ fees) will settle between 0.10% and 0.50%,” says Dhirendra Kumar, chief executive officer of Value Research, a research house on mutual funds.