The pension fund regulator is devising a capital protection scheme to allay subscribers’ fears of market volatility eroding their investment in the National Pension Scheme (NPS). Hemant G Contractor, chairman, PFRDA, in an interview with Saikat Neogi and Arun S, says that following the Bajpai Committee’s recommendation that life cycle funds are a good investment vehicle, the regulator is coming up with new life cycle funds where the risk-averse can invest in a fund with a lower equity cap while those willing to take on risk can go for a higher equity ceiling. Excerpts
Could you share the contours of PFRDA’s minimum assured returns (MAR) scheme? By when do you plan to introduce it?
The PFRDA Act mandates the provision of a minimum assured return scheme. The recently introduced Atal Pension Yojana (APY) is a defined benefit scheme in that sense. However, we are devising a capital protection scheme that may assuage the fears of potential subscribers with regards to market volatility eroding their investment, thereby helping NPS take off in the private sector.
You currently follow a passive investment strategy to keep costs low. Will you look at active equity investments?
Currently, about 90% of its AUM is in the government sector, which is already permitted to invest in shares of companies whose derivatives are available on the BSE or NSE along with option to invest in mutual funds and exchange-traded funds. During the process of harmonisation of investment guidelines between the private and government sector, the former will be allowed to follow the same pattern. Hence, there is really no shift except for small percentage of private sector subscribers.
In existing life cycle funds, the maximum equity investment is pegged at 50%. Do you think more life cycle funds should be introduced? Should there should be an option to auto switch, including directing new subscribers to the cheapest pension fund managers (PFMs) for first 12-24 months?
The Bajpai Committee has recommended that life cycle funds are a good vehicle for investment as they follow the principle of ‘decreasing risk appetite with age’. Hence, this principle can be utilised to design new products to suit various types of customers with different risk appetite. So, the risk-averse can invest in a life cycle fund with a lower equity ceiling while an aggressive customer can have buy a life cycle fund with a higher ceiling. We are in agreement with this concept and in the process of devising such products.
The concept of default PFMs is being looked into. Ideally, one would want the subscriber to consciously exercise a choice. However, considering the low literacy levels, it is an operational need to have a default PFM. Also, it is required to meet situations such as where one PFM, due to any reason, suddenly exits the system and the subscriber has to be temporarily shifted. The choice of a default PFM cannot be based solely on the criterion of cost or return. It has to be on the basis of other factors, including the quality of portfolio, liquidity, maturity etc. We are looking into the details and will devise a suitable methodology for it.
NPS Swavalamban is a defined contribution scheme whereas Atal Pension Yojana (APY) is a defined benefit scheme. The objective of NPS was to switch to defined benefit. Why are we returning to the old model?
Under APY, the subscriber has to contribute for his/her pension in a defined contribution scheme. However, to eliminate the uncertainty of the pension amount in retirement, the government is providing a guarantee on the pension amount with an objective to providing pension and inculcate the long-term savings habit among the targeted group, which is the unorganised sector.
How do you plan to tackle the absence of a developed annuity market in India?
As is the case world over, annuity markets tend to take time to develop. As purchase of an annuity is mandatory under NPS and since NPS’ subscriber base is growing, we expect market forces to exert enough pressures on annuity service providers to come up with procuts suiting market requirements and with a competitive return on investment.