INTERVIEW: PFRDA mulls wider options for pension funds’ equity invest

Informist, Tuesday, Apr 20, 2021


–PFRDA head: Mulling increasing Atal Pension Yojana coverage

–Mulling more options for subscribers at time of exit

–To invite RFP to design minimum guaranteed plans

–See AUM increasing 30% on year to 7.5 trln rupees FY22

–Expect large cos to join National Pension System FY22


By Tushar Chakrabarty and Sagar Sen
NEW DELHI – The Pension Fund Regulatory and Development Authority is actively looking to allow pension funds to expand their equity portfolios beyond stocks that have futures and options, Chairperson Supratim Bandyopadhyay said.


"We are having a close look at whether after so many years, we really need to work in the futures and options segment only or beyond that," Bandyopadhyay said in an interview to Informist.


"Maybe those companies which have large market capitalisation and wide acceptance but are not in futures and options segment are not coming under our ambit or our fund managers are not getting the benefit of that," he said.


Pension fund managers can currently invest only in shares of companies with market capitalisation of over 50 bln rupees and presence in the futures and options segment.


The regulator is also looking to increase the ambit of Atal Pension Yojana, Bandyopadhyay said.


"We are trying to increase the Atal Pension Yojana coverage and a discussion is on with the Department of Financial Services on whether it can be extended beyond 5,000 rupees with a different contribution structure so that the government burden of guarantee also comes down," he said.


Subscribers to the scheme can get a government-guaranteed minimum pension of up to 5,000 rupees per month.

The scheme has done well. Despite the raging pandemic, the total assets under management of National Pension System were up 38% on year to 5.8 trln rupees as on Mar 31.


Bandyopadhyay expects the assets under management to rise 30% to 7.5 trln rupees in the current financial year.


Following are edited excerpts of the interview:


Q. How was 2020-21 for the National Pension System?

A. Frankly, National Pension System could have been little better. But even a 10% (the number of subscribers in corporate and private individual segment) on-year rise, under the circumstances, was really good. The reason why National Pension System did not do as well was that a large chunk of inflow comes from the corporates. When the corporates transfer a large number of employees to the National Pension System, the entire corpus gets transferred. We had started discussions (about the transfers) but actually in many cases, they could not be concluded. This year maybe we will see some result. Otherwise, we were looking at a corpus of around 6.5 trln rupees and that could have happened.


The 38% growth in total assets under management was excellent and that is because our fund managers. Though it was very difficult, they could tackle the market, whether it was equity or debt. Whenever prices were down, they bought in good quantity, which actually gave good results in the later part of the year. Initially, we thought we will grow at 35%, so ending up with 38% growth was a surprise.


Q. What is your outlook for the current financial year given that COVID cases are on the rise?

A. This year anything above 30% will be welcome. Though it is very difficult to put a number with the kind of waves of pandemic we are seeing and it has a direct impact on the market. The moment a new vaccine gets approved, the markets rise. When the number of cases increase, the markets fall. So, it is connected to the pandemic. At 30%, around 7.5 trln rupees, is what we are expecting by March 2022.


We expect large corporates to join and now eight states have shifted to 14% contribution by the employer in line with Central government. We are expecting more states to join this time, those will be contributing 14% so through that higher contribution will come. The central government, from April 2019, started giving 14% as employer contribution, from 10% earlier. The 14% contribution by the government is calculated on basic salary and dearness allowance of the employees, whereas employees continue to give 10%.


Q. What changes could we see in regulation?

A. We are in talks with the Department of Financial Services on whether coverage under the Atal Pension Yojana can be more than 5,000 rupees, with a different contribution structure, so that the government's burden of guarantee also comes down.


Besides, we are looking to amend the PFRDA Act, which will include separation of NPS Trust. So as and when PFRDA Act is amended processes will become seamless.


Q. The law approving 74% foreign direct investment in the insurance sector has already been cleared. How soon can the work for a similar change in the pension sector begin?

A. The foreign direct investment part, as of now, we are linked with the insurance sector. Since our act (PFRDA Act) is also getting amended, we will hold it back for some time maybe to see that there is no change in the FDI part. Hopefully, there will be nothing because everybody is of the same view that whatever insurance is getting, pension sector also should get the same kind of FDI. I do not know, discussions are still going on. Once it goes to the Parliament, maybe in next 3-4 months, it will be done I believe.


We will have couple of more such discussions with stakeholders that whatever we are going to do, whether it will have a direct bearing on their day-to-day work. We obviously don't want to bring sudden changes or enter the territory of any other regulatory bodies. That we don't wish to do. Once these issues are sorted, it will move through Cabinet and go to Parliament. We have already held a couple of discussions at the highest level. Let us see how quickly we can do it.


Q. The first set of amendments are still pending. Considering hike in FDI as the second set of amendments, can the two amendments be clubbed together?

A. In 2015, an amendment to Insurance Regulatory and Development Authority Act increased it (FDI) to 49% followed by another amendment raising it to 74%. Since, in between, there was no amendment to our (PFRDA) act, we are still talking about 26%. So, it would be ideal to increase the limit to 74% through the amendment, or as is decided in the insurance sector by IRDAI.


Q. The proposal to separate PFRDA and NPS Trust has been pending for a long time. Can we see that happening in FY22?

A. We have started certain things such as recruiting people. There is a possibility that by end of May or mid-June, at least the general manager- and deputy general manager-level officers will join because their interviews are over and they have been given letters of appointment.


For lower-level officers, it may take another four months at least. Once that is done, I believe, 20 people will be in place. They will be supported by group of other consultants, those who are taken on contractual basis. So they will have a total universe of say 35 people headed by a chief executive officer to start with, I believe that structure will be enough to do the job. NPS Trustee Board has now been strengthened. Now we are making changes in the regulations as to exactly what NPS Trust will be doing and what balancing PFRDA will be doing because earlier there was lot of overlaps. So, internally, we are absolutely ready for that separation.


Q. PFRDA was mulling allowing pension funds to offer minimum guarantee plans. What is the progress on this so far?

A. It was discussed in the pension advisory committee. Pension advisory committee created a sub-committee consisting of 5-6 people and about 3-4 actuaries. We have given some 6-7 parameters as to what should be considered for constructing the product and the committee has given its views. Now it is clear that these are the parameters we have to put in a request for proposal. Once the request is out, we can seek bids from interested parties and obviously they are all actuarial firms of repute. They will bid and whoever wins that particular firm will be given the job of constructing this product with all the conditions that we have built in.


Once the product is designed then it will be approved by PFRDA and launched in the market.


Q. What changes are being considered in investment norms to improve returns and increase options for subscribers?

A. That is a constant process. In equity investment, we are still restricted to futures and options segment. We are having a close look at it whether after so many years we really need to work in the futures and options segment only or beyond that. Maybe those companies which have large market capitalisation and wide acceptance but are not coming under futures & options segment so they are not coming under our ambit or our fund managers are not getting the benefit of that. So that we are actively considering.


There was a restriction that you cannot go into bonds with a maturity period of less than three years. That also now we have opened up. They can go for bonds even below three-year maturity. Because to meet their immediate needs, they have lot of liquidity and they are seeing that that two-year bonds are giving good yields. So, if they wish to do it, these are strong corporates, then why not, so slowly all these things are doing.


Q. PFRDA has done research in terms of global practices, what type of new pension products can we see going forward?

A. The thing that we are working on seriously, apart from assured return, is for the pay-out phase. In pay-out phase, lots of countries have done lots of research and that is worth looking at. We are looking into those products and trying to find out what best we can do here. So that at the point of exit also, provided that the PFRDA Act allows us, to give exit related product.


Annuity rates are pretty low. If you look at the annuity rates, they are actually giving negative real return. We need to look into this. We have to give them options. But still, if somebody feels that 5% guaranteed for lifetime is still good for them then let them pick it. Because these are all options. When I am giving a product that does not mean that will become mandatory on the subscriber. That will be another option. Today there is no option. Today whether you like it or not anybody retiring they have to accept that.


Q. Any state still remains outside NPS regime?

A. Discussions with West Bengal and Tamil Nadu never stopped but at one point we came to know that West Bengal is no longer interested. So maybe for last couple of years I’ve not seen any further discussions. With Tamil Nadu it was going on. In fact, they were the first to sign memorandum of understanding with NPS Trust for transferring the money for their employees. But then there was a rethinking and they did not transfer anything. So there also now we are quite certain it is not coming.  End


Edited by Aditya Sakorkar


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