Pension Fund Regulatory and Development Authority has been functioning as an interim regulator since 2003 and has facilitated rollout of National Pension System (NPS) for employees in the public and private sectors, and even for workers in the unorganised sector. While the passage of the Pension Bill in Parliament will instil investor confidence in NPS, PFRDA chairman Yogesh Agarwal tells Raj Kumar Ray and Saikat Neogi how a market-linked defined contribution scheme can help subscribers reap higher returns from their savings and reduce the pension burden of the government.
Starting with new recruits in central government since 2004, the NPS has been rolled out for states, PSUs, private firms and even individuals. What’s the potential of the pension sector and how does the scenario change after the passage of the PFRDA Bill?
The potential for pension coverage is vast. We still have 88% of the population without any pension cover. Although the NPS corpus is doubling every year, we can’t put a limit as to how much the corpus will grow in the coming years. Most of the states have joined NPS as they have realised that they can’t sustain their pension liability (under the old ‘defined benefit’ system). Apart from the central and state government employees, 926 companies have joined NPS since December 2011.
With statutory status (following the passage of the PFRDA Bill), investors will have greater confidence in NPS. We already have a hold on pension fund managers (PFMs). But the Bill gives us more powers to regulate the sector through steps like imposing penalties on errant PFMs.
Considering that a vast majority of workers in the unorganised sector are without pension cover, will the focus be on spreading NPS among individuals and corporates? What strategy are you adopting to ensure that?
Yes. The focus is on individual and corporates. That’s why we have given the role of marketing to fund managers. It is wrong to expect banks to market the pension products. So we have increased the fees of PFMs to make it attractive for them to sell pension schemes. Beyond that, it will increase the charges.
NSDL enjoys a monopoly status as a central record keeping agency (CRA) and it is alleged that this has prevented further reduction in charges. Is there a case for appointing more CRAs to foster competition and reduce charges?
CRA charges have come down over the years. As the corpus grows, the CRA charges will come down further (as a percentage of the corpus). As more members join, we are looking at appointing a second CRA. We will have a request for proposal and then evaluate both on technical and financial parameters. NSDL also has to renew its licence after 10 years of operation. We have to go a long way. Competition (among CRAs) will improve efficiency. But we can’t expect too much reduction of cost as then efficiency and quality of services will be compromised.
Why not link charges to different slabs of investment or raise the minimum investment limit of R6,000 per annum so that the charges as a percentage of the corpus come down?
You can’t impose different charges depending on the value of investment. The administrative charges are same for all. However, point of presence (PoP) charges vary depending on the corpus of an individual. We are not thinking of revising the minimum investment limit as of now.
Are there any plans to relax the investment pattern of NPS?
We have already taken up with the government that their employees should get the same choices as private sector employees. First, in the investment pattern and, second, in choosing their PFMs. The government has agreed on the investment pattern. We have gone back to the government on PFMs saying why should they (government employees) be confined to PSU PFMs.
The finance ministry has agreed on that also, but we are waiting for a formal communication. Once we get that, we will notify the new rules.
Will you hike the equity exposure in NPS beyond 50%?
We are not thinking of that as yet.
PFRDA has allowed 8 PFMs so far. Are there more applicants? How many PFMs will you allow to enter the pension business?
There is already a flurry of applications including that from major foreign pension funds. But we are being selective. We are looking at 15-20 PFMs over the years. If we find some very good PFMs, we may allow them to manage NPS.
Now that the Pension Bill is passed in Parliament, do you see major FDI inflows?
The FDI limit in pension is linked to that in insurance. I am happy with 26% FDI cap. We will be happier with 49%. But the sectoral cap is a non-issue for pension as the minimum capital requirement is just R25 crore. Like mutual funds, the capital requirement is less in pension. Increasing FDI to 49% will provide for only R5.75 crore additional FDI in each PFM. FDI is important for insurance sector as it is a capital guzzler. FDI is needed in pension for attracting technology and expertise.
But don’t you expect foreign pension funds to forge joint ventures with Indian firms for pension foray?
Some of the foreign companies have already tied up with Indian firms and formed pension fund management companies—Reliance Capital has a joint venture with Nippon and DSP has tied with Blackrock. Both of them have got licences.
How do you intend to tackle the competition that NPS faces with similar products of insurance, mutual funds and even EPFO?
NPS is the only genuine pension product in the country. Others are masquerading as pension products but are not pure pension products. They are pretenders. They were being sold because NPS was not available a few years ago. NPS has the least cost and the best returns. Soon, those pension products of insurers will see a decline in their business now that NPS has picked up.
There has been comparison between PFRDA-regulated NPS and EPFO’s schemes over benefits and charges. How do you justify that NPS is better?
The track record speaks for that. The NPS offers far superior returns than EPFO schemes. Even the finance minister has said that new subscribers of Employees Pension Scheme (EPS) should be shifted to NPS. There is an element of subsidy in EPS but not in the case of NPS. World over, everybody is going for market returns. Even the EPF is offering market returns as the interest is dependent on returns from GSec, state government securities and PSU bonds. As interest rates have fallen over the decades, the EPF has been lowering its interest to subscribers. There is no getting away from the market. The other way is to ensure high returns is getting government subsidies.
While it is true that market fluctuations will not affect EPFO’s returns as it doesn’t trade in bonds, the PFMs under NPS trade in bonds and equities to reap the benefits of capital appreciation and pass on the benefits to subscribers. That’s the professional way of managing investment. After all, that’s what they (PFMs) are paid for. That’s what PFMs and MFs are all about.
Not all the PFMs have performed better as the NAVs vary across schemes and PFMs. How will you ensure that investors get the best deal?
We evaluate PFMs every month. Crisil has been appointed as a consultant to carry out the evaluation. On top of that, the NPS trustees meet and evaluate the performance every quarter. PFRDA also does its due diligence. As provided in the Pension Bill, we will soon constitute a technical advisory committee comprising professionals and experts to review various rules and suggest changes as the sector evolves.
The FSLRC has favoured a unified regulator for the financial sector. Do you see merit in that argument considering that there could be turf wars between PFRDA and others over pension products?
I will not comment on FSLRC’s recommendation. I have given my feedback to the finance ministry. There can’t be any turf war because we have been constantly saying that pension products of insurers will be regulated by IRDA and that of PFMs by PFRDA.