SBI Pension Funds Pvt. Ltd is the largest pension fund manager with an asset under management of nearly Rs85,000 crore that includes both the government and private sector. SBI Pension Fund, along with two other public sector pension fund managers, is also entrusted with the responsibility to manage the government sector corpus of the National Pension System (NPS). But that’s going to change as the regulator is looking to open up government NPS to the private sector pension fund managers as well. Kumar Sharadindu, managing director and chief executive officer of SBI Pension Funds talks to Mint Money on the impact of this decision and also how a delay in getting fresh licences impacts fund managers.

The auction for new fund managers was held in 2016 but the fund managers are yet to get fresh licences. How does this impact the fund managers?

The existing licences of pension fund managers were valid till November (2017). These have lapsed, but as per the clause in the earlier RFP (request for proposal), the licences are valid until the regulator agrees on new licences. So we continue to operate under existing norms, which means we continue to charge a fund management fee of 0.01%, which is unsustainable. Also, half of this is paid to the regulator as annual fee. Unlike the Securities and Exchange Board of India (Sebi), which caps the annual fees, there is no such cap in the pension sector. This puts further pressure on pension fund managers.

We are now given to understand that the regulator is in talks with the Ministry of Finance to sort out some issues and clarify on the foreign direct investment (FDI) norms. But if you look at Irdai (Insurance Regulatory and Development Authority of India), it issued clear guidelines on FDI internally without seeking government’s approval. The pension sector could also have done the same.

Hopefully we will get clarity on the matter soon. I am not sure what steps PFRDA (Pension Fund Regulatory and Development Authority) will take to issue fresh licences. We are yet to be informed.

A common gripe of pension fund managers is that the charge of 0.01% is unsustainable. But when the auction was held in 2016 with a maximum ceiling fixed at 0.1%, you bid the lowest fund management fee at 0.07%. So is 0.07% sustainable? 

The whole idea of a low-cost pension scheme is predicated on economies of scale. And we have been able to achieve scale. We manage close to Rs84,680 crore of assets although the majority of it is from the government sector. But even then, at a charge of 0.07%, I feel confident that we will be able to break even in a year’s time and perhaps even make operating profits. We are the largest pension fund manager and I feel 0.07% charge is sustainable for the private sector. It’s not a huge ask to raise it from the existing fund management charge of 0.01%. We need to invest in infrastructure, compliance, governance and skill-sets and for that we need to be in operating profits.

We have been in the business for the last 10 years and despite being the largest, we have operating losses. Despite the constraints, we have delivered good returns. But we need to keep performing like this with enhanced resources, and at this point, I feel it is not being appreciated enough. Though the chairman of PFRDA has admitted that pension fund managers can’t go on making losses, as eventually it will come at the cost of subscribers. There is a notion that only equity funds need to be managed actively. The bulk of our investments is in government and corporate bonds and they also need to be managed actively. The amount of tracking required in bonds is huge and for that one needs to invest in infrastructure and skills.

You, along with two other public sector pension fund managers, also manage the government NPS corpus, which is huge and also gives you economy of scale. But now it’s expected that the government sector will be opened to private sector fund managers and government employees will be able to choose from them. How are you bracing for this?

More competition is always welcome, but you need to understand that it was not the public sector pension fund managers who decided to manage the government NPS corpus exclusively. The government asked for that. And over the last 10 years, pension fund managers have invested money in infrastructure. So the question is, how do you compensate the public sector pension fund managers for all the money that’s been invested?

It would be better if the rules are applied prospectively. So the existing corpus continues to be managed as is. Currently, the employees don’t get to decide their pension fund manager; the rules have been laid out for the percentage allocation to each fund manager as well as the asset allocation. It will be better to leave the existing corpus as it is and open up choice for future contributions. If employees are allowed to choose the pension fund managers for their existing corpus, it will be a disaster owing to low liquidity in the bond market. Bulk redemptions to switch pension fund managers will make the three pension fund managers sell large quantities, thereby getting very low (distress) prices. Hence, large redemptions will cause huge losses to the employees deciding to remain.

Exchange-traded funds (ETFs) charge much lower than the current fund management cost of NPS. Doesn’t this in some way make NPS less attractive?

But where is the comparison or the competition? ETFs are investment products, primarily with equity as the underlying security, and are subject to performance of only the share market. 

Depending on the purpose of investment, one can invest into various financial products, including retirement products. So, yes, in that sense, it’s a complimentary product. 

NPS is purely a retirement product. The product design enables you to save for the long term and also choose an asset allocation. ETFs, being equity-based products, are high-risk products. But under NPS, the risk of equity investment is counterbalanced by debt funds. The expectation of someone investing for retirement is, safety of capital with a decent return, and NPS fulfils that expectation.

Don’t you think that the multiplicity of costs in NPS confuses subscribers? There are other market-linked products, like mutual funds, that have one expense ratio that subsumes all costs.

The architecture of NPS has multiple stakeholders with specific functions and each of them has a specified cost structure. Because of multiple stakeholders and the specified roles they play, I don’t think it’s possible to have one expense ratio. Also, unlike an asset management company that’s at the helm and is responsible for paying various entities, there is no one at the helm in the architecture of NPS. Having said that, it’s important to note that the additional costs are mainly fixed costs and make only a marginal difference. 

At a time when eNPS is becoming popular, is there any merit in increasing NPS distribution cost from Rs125 to Rs200 for on-boarding, and also add a persistency charge to it?

eNPS is a great initiative for the do-it-yourself population, which is largely confined to urban areas. But NPS is meant for all, and there are many who prefer face-to-face interaction or don’t have the means to be online. The hike is incremental. At Rs200 the idea is to make sure that distributors don’t make losses and remain interested in the job.