BackWhat PFRDA regulations mean for NPS
The pension fund regulator is contemplating on giving pension fund managers permanent licences
Premium
The Pension Fund Regulatory and Development Authority (PFRDA) released draft regulations on pension funds for the National Pension System (NPS) on 19 July. Its aim is to chalk out the eligibility criteria and functions of pension fund managers (PFMs). “These regulations lay down qualifying criteria for PFMs so that they are able to manage funds in a manner that protects investor interest. The idea is to ensure that these PFMs are fit, proper and adequately capitalized," said R.V. Verma, whole-time member (finance) and officiating chairman, PFRDA.
The pension fund regulation is part of the ongoing process of putting in place all the relevant regulations pertaining to NPS. There are other draft regulations put up on the PFRDA website for public comments. Comments on the pension fund draft regulations are invited till 18 August. Here is a look at what will now be the eligibility criteria of PFMs and how the implementation of regulations affect the bidding process for PFMs that is currently underway.
Eligibility
In January, when PFRDA decided to revert to the bidding process to select PFMs, it called for a request for proposal (RFP). According to this RFP, sponsors of a pension fund needed to have at least three years of experience in fund management both in equity and debt securities. But, according to the draft now, sponsors will need to have at least five years of fund management experience. This is a minor tweak with no impact as sponsors that have thrown in their hats have at least five years of experience. There are now eight contestants, namely HDFC Pension Fund Management Co. Ltd, LIC Pension Fund Ltd, ICICI Prudential Pension Funds Management Co. Ltd, Kotak Mahindra Pension Fund Ltd, Reliance Capital Pension Fund Ltd, SBI Pension Funds Pvt. Ltd, UTI Retirement Solutions Ltd and Birla Sun Life Insurance Co. Ltd (a new bidder), that are awaiting fresh licences after having matched the lowest bid of 0.01% as fund management charge quoted by Reliance Pension Fund. Other than this, according to the draft, the sponsor needs to have a positive net worth on the last day of each of the preceding five financial years. The pension fund is required to have a minimum positive net worth of 25 crore or an amount specified by PFRDA at all times. Not much has changed compared with the RFP proposal. However, there is a minor change in the profitability aspect. The draft states that the sponsor should have profit after tax in at least three of the preceding five financial years, while the RFP asked for profits in all the immediately preceding three years. “The qualifying criteria are not very different from the ones spelt out in the RFP. The only change is that it has sought to expand the role of sponsors to have a greater supervisory role," said Verma.
These regulations specify that PFMs should have the ability to provide guaranteed returns through minimum assured return schemes as may be notified by PFRDA. The PFRDA Act, 2013 brought two key amendments to NPS. First was the option of guaranteed funds so that investors seeking a minimum assured return have the option to invest funds in such schemes, and second was the flexibility of partial withdrawals up to 25% of the fund value. The draft on partial withdrawal is already out (https://goo.gl/CmlU0L ) and minimum assured schemes are awaited. However, this scheme may come at an extra cost for providing guarantee, as PFMs may not be able to offer guarantees at a fund management cost of 0.01%.
Role of PFM
PFMs are not allowed to undertake any other activity other than those relating to pension funds, but with regards to their marketing role, the draft regulations don’t give a clear-cut plan of action except mandating a strict segregation of functions within the pension fund. “The pension fund shall ensure, at all times, separation between its staff responsible for distribution and sales, investments, settlement and book-keeping, if any," states the draft guidelines. However it does not make clear in what manner PFMs will be entrusted the responsibility to market NPS. The RFP, on the other hand, allowed PFMs to sell or market NPS by setting up point of presence subsidiaries. “We have left this open-ended because we want more opinion on this," said Verma.
These regulations also do not specify the investment pattern for PFMs, but according to Verma, there would be separate investment regulations. PFRDA revised the investment guidelines in January this year to prohibit active fund management of equity funds. “Pension funds should invest in mutual funds/exchange-traded funds/index funds directly (through in-house replication) such that the double incidence of cost is avoided," said the circular. “PFM’s are still awaiting clarity on many aspects. It’s not clear if we have to replicate the index in-house or can invest in mutual fund schemes. We have also asked PFRDA to confirm that if we go through the mutual funds route, who will take care of the double charges incurred? In the meantime, there are some PFMs that continue to actively manage funds pending clarifications but we have implemented the guidelines," says Sumit Shukla, chief executive officer, HDFC Pension Fund.
Change in fee and tenor
The biggest departure in the pension fund guidelines have been in two areas: fee structure and tenor. The RFP stated a fee of 1 lakh as application processing fee to be paid to PFRDA and an annual fee that would be higher of 0.005% of the assets under management (AUM) or 2.5 lakh payable to PFRDA. However in the draft regulations, there are three types of fees payable to PFRDA. The first is a scheme-wise fee. For government schemes or NPS for the government, PFMs will have to pay an application fee of 10 lakh and for private sector NPS, it is 15 lakh. In addition to this, PFMs will also have to pay a registration fee of 25 lakh. The annual fee will be the higher of 10 lakh or 0.005% of the AUM. “How can we pay such high fees at a fund management cost of 0.01%? It would have been better if the regulations were out before the bidding process started. Now as PFMs, we will have to absorb all the changes in the regulations," said a PFM who didn’t want to be quoted. PFRDA, on the other hand, doesn’t see an immediate impact. “We have completely de-linked the two. PFMs will be selected on the basis of the RFP and in due course when the regulations are notified they will be given enough time for transition," assured Verma.
As for the high charges, PFRDA is contemplating giving permanent licences as opposed to a period of five years mentioned in the RFP. “We plan to do this in order to build confidence in both PFMs and investors. It’s possible that PFMs may have to apply again but we will make sure that the transition is smooth and not disruptive. We will retain enough flexibility for suitable price discovery and also for expanding the number of PFMs as AUM grows," said Verma. As PFRDA continues to chalk out regulations, many in the industry worry about NPS’ poor penetration. “Where is the road map to increase the footprint of NPS? We want some direction from PFRDA as to how do they plan to increase consumer awareness and sell NPS. This is the main problem and the regulator should address that as soon as possible," said a fund manager on condition of anonymity. NPS is a good scheme to save for retirement, however, currently the regulations are being drafted. If you are looking to invest in NPS, we recommend you start by investing only a small portion and increase your allocation in due course of time.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
