The pension regulator is in the process of investing in new asset classes such as Real Estate Investment Trusts, Infrastructure Investment Trusts and Asset-Backed Securities to enhance yield. It is working to harmonise the investment patterns of the government and private sector, and introduce new life-cycle funds. Hemant Contractor, the chairman of the Pension Fund Regulatory and Development Authority (PFRDA), in an interview with FE’s Arun S and Saikat Neogi, says that as the system matures, the regulator will have to do careful liquidity planning and look into the recommendations of the GN Bajpai committee report to introduce an asset liability management system which will balance the need for prudential and efficient investment with liquidity requirements. Excerpts:
The GN Bajpai panel has suggestions such as increasing equity exposure, investing in new asset classes, harmonisation of government and private schemes. How and by when do you plan to implement these?
The Bajpai panel has recommended movement from the current ‘direct investor regime’ to prudent investor regime through various measures including review of ceilings of asset classes, introduction of new asset classes, introduction of new instruments under each asset class, opening up of the government sector, etc. The report is already under the consideration of PFRDA. Keeping in view the phased approach suggested by the panel and the preconditions laid down in the report, we are considering implementing only some of the doable elements immediately, such as introduction of REITs, InvITs, asset-backed securities, introducing new life-cycle funds, etc. We are also moving towards opening up of the government sector and harmonisation of the guidelines between the government and private sector through a due consultation process with the government. As the market matures, the other recommendations shall also be considered for implementation in a phase-wise manner.
How can you assure a stable policy for pension fund managers (PFMs) where they will be able to both manage and market the fund, and what kind of firewall can avoid conflict of interest and prevent mis-selling?
The issue of marketing by pension funds has been dealt in several reports now, including the recent Bajpai committee, which has also reached a conclusion that the time is ripe to allow pension funds to market NPS. Further, with the passage of the PFRDA Act and the regulatory framework in place, the issue of mis-selling can be effectively handled, especially with a transparent, system-driven, standard product like NPS.
It should not be forgotten that marketing has several aspects including brand-building and positioning, awareness creation, and canvassing, which culminates into actual transaction of sale and purchase of the product. Therefore, while points of presence (PoP) continues to be responsible for onboarding of the subscriber, PFMs can engage in a host of other activities. As onboarding shall be done through PoPs, the subscriber retains the choice of PFMs and can also change it every year. So, essentially, there is no conflict of interest.
One of the major problems with NPS for private sector is its limited reach and even reluctance on part of banks to open accounts. How are you addressing these?
Currently, we have around 35,000 branches of PoPs offering NPS as PoP-service providers across the nation, so outreach is not limited even today. In the recently published PFRDA (PoP) Regulations 2015, we have relaxed the eligibility criteria for becoming PoPs under NPS to have better outreach and increasing the competition. We have also enhanced the account opening charges from Rs 100 to Rs 125. Moreover, we are working on online opening of NPS accounts, which will be available shortly.
The NPS is predominantly in the accumulation phase. About 2.25 lakh subscribers are expected to exit the NPS system in the next five years, which will need an efficient asset liability management to meet the payouts at least cost to the system. Are you putting in place such a system?
Yes, we are expecting that about 2.25 lakh subscribers would exit the system in the next five years. But that’s one side of the story. Onboarding and hence inflow is going to be much higher. We have onboarded about 90 lakh subscribers in the last 7-8 years and with singular tax exemption of R50,000 for NPS, and choice to subscriber between EPFO and NPS, the rate of growth of subscribers under NPS is bound to quicken. Thus, liquidity is not an issue right now.
But as the system matures, we will need to do careful liquidity planning. We are looking into the recommendations of the committee to introduce an ALM system for the future which balances the need of the prudential and efficient investment with liquidity requirements of the system.
Since the government is pushing for Aadhaar-based financial inclusion strategy, will an online model help develop the pension market in the country?
For the Atal Pension Yojana (APY), we have come out with APY model, which is an online platform that can be easily integrated with the PoP/aggregator system and is Aadhaar-enabled. This model would go long way in facilitating financial inclusion. We are planning to introduce online model for other NPS subscribers as well.
The investment management fee charged by pension fund managers is 0.01%, which is very low to push the product.
Will you revise the charges?
Firstly, it needs to be clarified that the investment management fee was discovered through an auction-based process and accepted by all pension fund managers. However, as the market evolves, there will be learnings for players as well as for the regulator and and efficient cost structure for both the subscriber and PFs will come into play eventually.
What are the short- and medium-term targets for APY and NPS?
We are striving for around 1 crore subscribers under NPS-private sector till 2020. The government has set a short-term target under APY for covering 2 crore subscribers till December 31, 2015. The medium-term target for APY, in fact, is to ensure and maintain the persistence of the enrolled subscriber.