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Business News/ Opinion / Online Views/  An empowered pension regulator at last
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An empowered pension regulator at last

But the work of getting pension products right isn’t over. Loose ends remain

Illustration by Jayachandran/Mint (Illustration by Jayachandran/Mint)Premium
Illustration by Jayachandran/Mint
(Illustration by Jayachandran/Mint)

It took over a decade, but the Pension Fund Regulatory and Development Authority (PFRDA) Bill was finally pushed through Parliament on 6 September. The legislatively backed regulator, which oversees eight pension fund managers and manages about 35,000 crore across nine investment schemes for more than 5 million subscribers, started its journey in a research report in 2000.

It was the Old Age Social and Income Security (OASIS) Report that made the far-sighted recommendation that India needed a mass vehicle for unorganized workers—who did not have access to a formal, regulated, pension—to access a pot of money after their retirement. The other significant recommendation was that India should move from a defined benefit to a defined contribution pension model. This implied that returns on a mark-to-market basis for whatever underlying asset the investor chose instead of an assured sum at retirement.

PFRDA was established in 2003 and by January 2004 all Union government officials moved to what was then called the New Pension System (NPS). In 2009, NPS (now called the National Pension System) was open for subscription to all Indians. NPS has been constructed as an investor-friendly, market-linked and defined contribution choice that gives subscribers the option of putting half their subscription into an equity fund. The full portability across workplaces and locations made NPS one of the first pan-Indian schemes that used smart cards to offer flexibility. NPS, the cheapest market-linked product in the world for retail investors, removed the conflicts of interest that have made other retail products so deeply distrusted in India.

It has taken 13 years from the OASIS Report to the PFRDA becoming a statutory regulator. Ironically, 2013 is also the year in which another report has been tabled—13 years after the OASIS report—that calls for a unified regulator across the financial sector. The Justice B.N. Srikrishna report recommends a twin regulator model with the Reserve Bank of India as the banking regulator and all other regulators (be they for capital markets, insurance, forward markets or pensions) being unified into a Unified Financial Regulatory Agency.

While the wheels of change turn slowly to that end, in the meantime, PFRDA has become a statutory regulator. This means that while there will be no change in NPS products, what the law will do is to give powers to the regulator to take action against various market participants without going to court. Additionally, the law has linked issues relating to the foreign direct investment (FDI) limit in pensions with those in insurance, thus postponing the FDI fight to another day.

The law also gives an option to the investor that promises a guaranteed return. Given the overall manner of direction imparted by the Union ministry of finance in such matters, it is probable that the interpretation of "guaranteed" return will not imply an arbitrary declaration of a return rate each year. It is quite possible that this will be similar to the system that Public Provident Fund and other small savings return rates have moved to, under which they are linked to the yield on government securities.

Discerning investors will then have the choice to look at the other market-linked (both debt and equity) options that NPS offers that have given returns ranging from 8.50% to 14.4% in 2012-13. In comparison, the Employees Provident Fund rate of return in the same year was 8.50%.

Though the law has been passed, the work of getting the product right is not over yet. There are three loose ends.

One, NPS needs to be made tax-friendly so that the money a subscriber gets at the end of his investment lifetime is not taxed. Currently, 60% of NPS corpus can be withdrawn at exit after the subscriber turns 60 and this will be taxed at the marginal tax rate.

Two, the annuitization (generating a life-long pension stream by handing the money over to an insurance company) of 40% of the corpus should be a default option rather than the only option.

Three, the tinkering with NPS products must be better thought through than it is currently. NPS was envisaged as a very low-cost product that would offer investment in equities through an index fund (this is the lowest risk road to getting an equity exposure to an investment portfolio).

In the last two years, both have been changed. The NPS fund management fee is now 0.25%, up from 0.0009% earlier. More worryingly, PFRDA has quietly allowed the fund managers to move from index funds to active management of equity.

Are pension schemes in India investor-friendly? Tell us at views@livemint.com

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Published: 10 Sep 2013, 09:05 PM IST
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