Performance has been included as one of the criteria in assessing public sector pension fund managers, marking the end of an era when a company’s track record did not matter in managing public money.
“We will use two measures: fees they are willing to charge and past performance,” said D. Swarup, chairman of Pension Fund Regulatory and Development Authority, or PFRDA, about the criteria that will be used to divide pension corpus in future among the three public sector fund managers.
PFRDA has already selected three public sector fund managers—State Bank of India, UTI Asset Management Co. and Life Insurance Corp. of India—to manage pension savings of Union and state government employees. The fund managers have been given a three-year contract.
PFRDA’s decision comes in the wake of discontent among the trustees of India’s largest social savings scheme run by the Employees’ Provident Fund Organization (EPFO), which manages some Rs1.7 trillion belonging to more than 40 million people.
EPFO has, for years, given the State Bank of India monopoly rights to manage the funds, and some of its trustees feel the bank’s performance has been lacklustre. Consequently, they are open to introducing competition in managing funds.
Dividng the corpus: PFRDA chairman D. Swarup. (Photo: Madhu Kapparath/ Mint)
SBI could not be immediately reached for comment.
PFRDA, which currently has a more limited mandate of managing pension funds of only government employees, has gone a step further by saying that in addition to starting off with competition among fund managers, its architecture would be designed to keep it competitive all through.
PFRDA’s three pension fund managers are expected to start managing the funds by 31 March and will charge a fee of 3-5 paise for every Rs100 they manage.
The three were selected, as they were among the lowest bidders in terms of fees, to manage government employees’ pension savings.
Of the three, State Bank will get to manage 55% of the pension corpus, UTI will manage 40% and LIC the residual 5%. The corpus of more than Rs3,000 crore has been split among the three fund managers based on the fees they were willing to charge.
Next year, when the pension corpus is split among them, their performance in fund management would be studied along with the fees they are willing to charge, Swarup said. The better performers will be in a more advantageous position, he added.
PFRDA has been charged with the task of bringing about far-reaching changes in the pension systems of government employees. Employees of the Union government, who joined after 31 December 2003 are no longer entitled to guaranteed pensions. Instead, their pension would depend on the returns generated on their savings.
PFRDA pension architecture, dubbed the New Pension System, or NPS, allows fund managers to invest up to 15% of the corpus in equities. Moreover, people who are a part of NPS will be allowed to choose their fund manager as well as the kind of investment pattern they want.
National Securities Depository Ltd (NSDL) has been picked as the central recordkeeping agency (CRA), which will create individual accounts of the people in NPS.
PFRDA has urged the governments (Union and the 19 states that have signed up for NPS) to reconcile their accounts and transfer individual subscriber details to CRA by 1 June. Until the CRA infrastructure is fully functional, NPS will pool its more than Rs3,000 crore corpus that belongs to 300,000 employees and ask the fund managers to start investing.