BackPFRDA would like to junk annuities and go flexi
The FinMin has approved in principle making the Pension Fund Regulatory and Development Authority the sole regulator for all Indian pension products, said Supratim Bandyopadhyay, a member of the authorityPFRDA also proposed introduction of a Systematic Withdrawal Plan for NPS subscribers on maturity as an additional option
PremiumPFRDA whole-time member Supratim Bandyopadhyay announced a slew of proposals for NPS at a media interaction on Friday. Three of these changes suggested by the PFRDA have received in-principle approval from the Finance Ministry, according to Bandyopadhyay. They will be sent to an inter-ministerial body for a final decision. A decision on these issues is expected in time for the Budget session.
The first proposal is the setting up of a unified regulator for all pension products. At present pension products are governed by different regulators. Unit Linked Pension Plans (ULPPs) and annuities are governed by the Insurance Regulatory Development Authority of India (IRDAI). Employees’ Pension Scheme (EPS) is governed by Employees’ Provident Fund Organisation EPFO and superannuation funds are managed by either employers or insurance companies, regulated by the IRDA. Retirement funds are managed by Mutual Fund houses regulated by SEBI. These products also have different costs for subscribers and incentives for distributors, creating confusion in the pension market in India. “As far as a unified pension system is concerned, this is a necessity to avoid complexity and confusion," said Sumit Shukla, CEO, HDFC Pension Fund. “A good pension system will also make long term funds available for investment especially in infrastructure and economic growth," he added. However the proposal to allow subscribers to migrate between the EPF and NPS was dropped in the new Social Security Code. “Different regulators create distortions in the market. A single regulator will give a clear vision and direction to the Indian pensions landscape," said Amit Gopal, India business leader - investments, Mercer.
The second change proposed by the PFRDA is the introduction of a Systematic Withdrawal Plan (SWP) for NPS subscribers on maturity as an additional option. This option will be offered for the 40% component of the NPS corpus on maturity which has to be currently used to buy an annuity. An SWP withdraws a fixed amount every month from an accumulated corpus. The remaining money continues to be invested. According to Bandyopadhyay, the taxation of the SWP may be akin to that of mutual fund SWPs but this is yet to be finalized. Alternatively, the PFRDA has suggested that pension fund managers be allowed to float annuities or cash management products rather than insurance companies as is currently the case. “With SWP, investors will get more freedom to withdraw as per their needs rather than being locked into an interest rate. However the taxation of the SWP needs to be seen before understanding how big a move this is," said Amol Joshi, founder, Plan Rupee Investment Services.
The third proposal is a separation of the NPS Trust and PFRDA, a proposal that was already floated in the Budget but has not yet been implemented. The NPS Trust plays a role in the operation of NPS schemes and hence should be distinct and separate from the regulator (PFRDA) which supervises them. “There absolutely should be a separation between the regulator and NPS trust, so there is no conflict of interest," said Shukla. Another reform suggested by the PFRDA for Budget 2019 is the hiking the tax deduction for NPS under Section 80 CCD (1B) from ₹50,000 per year to ₹1 lakh per year. For the Atal Pension Yojana, the PFRDA has proposed a hike in the maximum pension to ₹10,000 per month from the current ₹5,000 per month and a hike in the maximum age from 40 to 50 years.
Recent media reports have stated that the government is considering a hike in the FDI cap in insurance from 49% to 75% which is also likely to affect FDI in pension funds. Once these proposals are cleared, there will be another request for proposals (RFP) for Pension Fund Managers said Bandyopadhyay and there could be a re-look at pension fund manager fees. These are currently capped at 0.01% which has made the business unviable for many players in the industry. Incentives for agents and distributors is also another area in which the PFRDA is considering changes. At present NPS Points-of-Presence (distributors) get a maximum of 0.25% of each contribution. However, this is far short of the roughly 1% that mutual fund distributors get and the far higher charges (8-10% of premiums) that insurance agents get.
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