Private sector players may have reacted positively to the interim Pension Fund Regulatory and Development Authority?s (PFRDA) invitation for expressions of interest from fund managers to invest the corpus of citizens who join the New Pension System (NPS) voluntarily after April 1, 2009. But the existing fund managers appointed by the PFRDA in 2007 to manage the savings of government employees under the NPS ? UTI Asset Management Company (UTI AMC), State Bank of India (SBI) and the Life Insurance Corporation of India (LIC) ? are fuming over the regulator?s latest move.
The prospect of managing significant pension savings, which are very long term in nature, comes at a time when domestic mutual fund and insurance players have been badly hit by the market meltdown. Private sector players are expected to bid aggressively for the PFRDA?s latest mandate, especially since they were kept out of the fray when the public sector fund managers were picked in 2007.
But SBI, LIC and UTI AMC feel that getting new managers for the citizens? pension scheme throws their entire pension business, which is already losing money, in disarray. ?This belies all logic. When we bid for the NPS, we were told that the corpus would grow very fast. But for a year, we didn?t get any money to manage. This April, we were given around Rs 1,550 crore but hardly any new money has flowed in since,? says an exasperated CEO of one of the existing fund managers.
The idea that more managers will bring down fund management costs doesn?t cut ice easily. UTI AMC charges 3 basis points (0.03%) of assets, while SBI and LIC charge 0.05% as fees.
?We kept our bids this low on the assumption that the corpus would grow and eventually unorganised sector workers will also join the scheme. With fees of 3 to 5 bps, we need at least Rs 10,000 crore of assets each, just to break even. If the PFRDA gets new fund managers for lower fees with no guarantee of a significant initial corpus, the new managers will also find the going difficult,? said a senior SBI official.
Indeed, if the Employees? Provident Fund Organisation?s (EPFO) recent experience in appointing new fund managers is considered, bids from private players could go as low as zero. Though EPFO disqualified the zero bidders, the bids by the selected managers ? Reliance Capital AMC, Prudential ICICI AMC and HSBC AMC ? are in the range of 0.0063% to 0.01%.
In EPFO?s case, however, the funds in question are substantial. Securities worth Rs 20,000 crore have already been transferred to them and incremental inflows each year amount to at least Rs 30,000 crore. By contrast, the citizen?s pension scheme being created by the PFRDA will be voluntary in nature and hence, would need a significant awareness initiative before gaining momentum.
A senior PFRDA official, however, said the PSU managers are simply wary of competition. ?As a regulator, we have to look after the interest of the subscribers as much as we have to consider the interests of the fund managers, if not more. We need competition not just for better price discovery, but also for better efficiency and competence in fund management,? the official asserted.
?Half of the government employees? contribution records are yet to be transferred to the central record-keeping agency. Many employees? contributions have still not reached us for investment. The PFRDA needs to focus on improving these systems and improve the flow of monies to existing managers who are incurring losses with low fees and abysmal volumes,? points a senior official from one of the existing managers.
While the PFRDA has allowed SBI, LIC and UTI to bid for the new mandate as well, they are wary of bidding differently from their original bids.
?Whether we bid higher or lower than our current fees, questions are bound to be asked how we can justify different rates for the same function,? a fund manager stresses.
Social security experts also feel that the PFRDA could have waited for the PFRDA Act to be passed before bringing in new fund managers.
As far as government employees? pensions are concerned, the PFRDA has the government?s mandate to appoint managers and intermediaries based on an employer-employee relationship.
?Since the PFRDA is still without legislative backing, it may find it tough to enforce contracts with the new separate fund managers it?s appointing for citizens joining the NPS. An aggrieved subscriber may not get easy grievance redressal, especially since the PFRDA would have to haul errant intermediaries to civil courts to take any action,? an analyst points out.
There?s another aspect to the problem. Currently, citizens can buy a pension plan marketed by insurance companies and regulated by the Insurance Regulatory Development Authority. Pension funds with income tax benefits are also available from UTI AMC and Franklin Templeton AMC, regulated by the Securities Exchange Board of India.
?PFRDA?s new scheme will create a third set of pension fund players, but it won?t have the regulatory powers over them like IRDA or SEBI has. This can be extremely confusing for investors,? a financial advisor said.
