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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Changing rules after bids are in

PFRDA needs to put some more thought behind its plan of action

The National Pension System (NPS), which is arguably one of the world’s best retirement savings programmes, is just not getting the attention it deserves from the people it was made for. To be fair, NPS is stacked against commission-heavy, more-visible products such as insurance, making it a tiny speck. What worsens the poor traction is the haphazard way in which the Pension Fund Regulatory and Development Authority (PFRDA) is writing the rules of the game.

NPS has functioned without a statutory authority for almost five years. After a long struggle of nearly a decade, PFRDA got its statutory standing only last year. Given the struggle for statutory recognition, one would have hoped to see the regulator making up for lost time, taking concrete measures to stabilize the scheme and making it popular.

But in the past seven months alone, directions from the top have been rather unsystematic. The NPS journey still seems fraught with hiccups, the latest among which is pension fund regulations spelling out slightly different eligibility criteria and starkly different fees structures from what was stated when PFRDA called for bids from PFMs in January. On top of this, these draft regulations come at the fag end of the bidding process.

In January this year, PFRDA had decided to revert to the bidding process after it was disrupted in 2012. In 2009, NPS started with six PFMs who bid for a fund management cost of 0.0009%, but soon, due to unimpressive footprint, sustainability became an issue and one PFM withdrew. Then, in 2012, the auction system was thrown out of the window and a fund management charge cap of 0.25% was decided. This, along with other changes such as bringing more PFMs into the fold and allowing them to market NPS as well, was expected to help the programme gain traction. But not only did this not work as desired, it adulterated the beautiful design of NPS, which put strict firewalls between different entities of the NPS architecture.

So, after the pension Bill was passed and the then chairman of PFRDA, Yogesh Agarwal, quit, PFRDA once again decided to go back to the bidding process. However, it didn’t completely revert to the original design of not allowing the PFMs to market NPS.

For a scheme that’s been around for five years, this back and forth can be disruptive: markets usually respond well to stability as opposed to constant change. Nonetheless, bids were invited and Reliance Capital Pension Fund Ltd surprised us all when it bid for a fund management cost of 0.01%. A result of this was that DSP BlackRock Pension Fund Managers Pvt. Ltd, which got its licence in 2012, chose to opt out since it did not match the lowest bid. The others, including a new entrant, chose to stay in the game. But soon after the bids were nearly done, came the draft regulations on PFMs with some significant discrepancies.

To begin with, there was a much higher fee structure. The draft regulations have three kinds of fees payable to the authority. The application fee is 15 lakh for the private sector NPS and 10 lakh for the government NPS. Then there is a registration fee of 25 lakh. There is an annual fee of 0.005% of the assets under management (AUM) or 10 lakh, whichever is higher. In the request for proposal (RFP) for the bidding process, the application registration fee mentioned was 1 lakh and the annual fee was the higher of 0.005% of the AUM or 2.5 lakh.

The new increased fee calls into question the viability of a fund management charge of 0.01%—at this level, a PFM will need a corpus of 1,000 crore to be able to pay the annual fee of 10 lakh to the regulator. At present, the private sector NPS manages around 3,577 crore of AUM, with a bulk of this being with the public sector PFMs and about 400 crore with the private PFMs.

It would have made more sense to first draft the pension fund regulations and then call for bids, so that PFMs could make a true assessment of costs involved. Although PFRDA says it will give PFMs time and will take steps to ensure a smooth transition, where was the need to put the cart before the horse? After the PFRDA Bill got cleared last year, it was natural to draft regulations on all aspects relevant to the NPS. Why did the bidding have to precede regulations? Wouldn’t it have been better to first get the draft ready instead of disrupting the NPS’s progress a third time?

And this is not all; there is one other point of departure from the proposal. According to the proposal, PFMs were to be given the licence for five years, but the draft seeks to give a permanent licence. This is a big step for PFMs because initially PFRDA had decided to give licences for a brief period so that the PFMs could bid to get their licence again and the whole process would help at better price discovery. But it’s not certain if the bidding process would go. Draft regulations don’t mention the modalities but PFRDA told Mint Money that enough flexibility would be given to ensure better price discovery and to allow for more PFMs as the AUM grows. But shouldn’t this have been explained in greater detail in the pension fund draft? After all, it’s a draft for public opinion and it shouldn’t raise more questions than it answers.

The steps being taken seem either whimsical or rushed. PFRDA needs to put some more thought behind its plan of action. What it also needs to do now, and do it quickly, is to focus on increasing consumer awareness and popularity of NPS.

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