Government employees covered under the National Pension System (NPS) will soon get the right to choose their retirement fund manager, switch him if not satisfied with his performance and opt for higher (50%) investments in equities as the Pension Fund Regulatory and Development Authority (PFRDA) looks to liberalise norms for the sector’s growth.
These changes, which will likely be approved by the pension regulator at its board meeting on May 15, could ultimately end the monopoly of the three government sector pension fund managers (PFMs). These PFMs — SBI Pension Funds Private, UTI Retirement Solutions and LIC Pension Fund — managed Rs 69,316 crore, or 91% of the Rs 76,509-crore NPS assets under management (aum), as of January 2015.
The number of government staff enrolled under NPS stands at 38.5 lakh. The Centre made the defined contributory pension scheme mandatory for employees who joined the service on or after January 1, 2004. It has since been adopted by most state governments also.
After NPS was opened to the private sector in 2011, 3.46 lakh subscribers were enrolled under the scheme with AUMs of Rs 5,199 crore. However, this is not enough for eight extant PFMs to sustain their business for long.
“This (the proposed changes) will lead to a more rational allocation of funds among both private sector and government sector pension fund managers,” said RV Verma, member (Finance), PFRDA.
While the annualised return from the central-government NPS was below 11%, the returns from equity investments by the corporate-sector NPS subscribers have been much higher. That is because, unlike the government sector, where NPS equity investment is capped at 15%, corporate sector NPS subscribers are allowed to invest up to 50% in equity and choose their PFM based on their performance.
In the government sector, NPS contributions are equally split among the three selected PFMs, who invest the money in a pre-decided manner.
“Many of the central government departments said employees can study the market and make their investment decisions, so why should we deprive them of that,” Verma added.
To multiply NPS users’ equity investment avenues, the Bajpai panel has also recommended giving more space to PFMs to invest in newer instruments such as the ones issued by private equities, venture capital funds and exchange traded funds, subject to the overall cap.
Competition would lead to a volume-driven business model as well as efficient pricing, Verma added.
The cap on equity exposure in NPS for government staff is likely to go up from 15% to 50%.
Freedom to choose the pension fund manager (PFM) would create a level playing field for all PFMs and should lead to rational allocation of funds among PFMs, feel experts/
Competition will lead to volume-driven business and efficient pricing, encouraging more players to enter the pension business.