Key Takeaways
- • Kumar Sharadindu, MD and CEO of SBI Pension Funds, says the firm can break even within a year and possibly reach operating profits at a 0.07% fund management charge, versus the current 0.01% rate that he calls unsustainable.
- • SBI Pension Funds manages close to Rs84,680 crore in assets, the majority from the government sector, and is the largest pension fund manager in India's National Pension System (NPS).
- • Fund managers continue operating on lapsed licences (valid until November 2017) because the earlier RFP allows them to remain in place until PFRDA issues new licences, and PFRDA has not yet informed them of its licensing steps.
- • Sharadindu opposes letting government NPS employees switch managers on their existing corpus, warning that bulk redemptions would force distressed bond sales and losses, and proposes applying any opening only to future contributions.
- • He argues NPS's multiple cost layers cannot be collapsed into a single expense ratio because of its multi-stakeholder architecture, and says the proposed distributor on-boarding fee hike from Rs125 to Rs200 is needed to keep distributors viable.
Summary
SBI Pension Funds, the largest pension fund manager under India's National Pension System, is operating under licences that lapsed in November 2017 but remain effective under the earlier request for proposal until the Pension Fund Regulatory and Development Authority (PFRDA) issues new ones. According to managing director and CEO Kumar Sharadindu, speaking to Mint Money, the firm continues to charge a fund management fee of 0.01%, which he describes as unsustainable, with half of that paid to the regulator as an annual fee. Unlike the Securities and Exchange Board of India, which caps annual fees, the pension sector has no such cap, adding further pressure on fund managers.
The 2016 auction set a maximum ceiling of 0.1%, and the winning bids were as low as 0.07%. Sharadindu said he is confident that a 0.07% charge would allow the firm to break even within a year and possibly generate operating profits, which he needs to fund investment in infrastructure, compliance, governance and skill-sets. He noted that SBI Pension Funds has run for about ten years and has operated at a loss despite delivering good returns, and said the PFRDA chairman has acknowledged that managers cannot keep making losses. He also argued that bond portfolios, which form the bulk of the firm's holdings, require active management and substantial tracking infrastructure.
On opening the government NPS corpus, which SBI Pension Funds shares with two other public-sector managers, Sharadindu said more competition is welcome but that the public-sector managers were assigned the government mandate by the government and have invested in infrastructure accordingly. He proposed that any rules be applied prospectively, leaving the existing corpus unchanged and opening choice only for future contributions. He warned that allowing employees to switch managers on the existing corpus would force large sales in an illiquid bond market at distressed prices, causing losses for those who stay.
On cost structure, Sharadindu said NPS is a retirement product distinct from exchange-traded funds, which he described as high-risk equity products, and that NPS's debt allocation offsets equity risk. He said the multiplicity of NPS costs cannot be consolidated into one expense ratio given its multi-stakeholder architecture, and that the additional costs are largely fixed and marginal. Regarding the proposed increase in distribution on-boarding charges from Rs125 to Rs200 and a persistency charge, he said eNPS suits digitally active urban users, but NPS must serve those who prefer face-to-face service, and the increase is intended to keep distributors profitable and engaged.
The 2016 auction set a maximum ceiling of 0.1%, and the winning bids were as low as 0.07%. Sharadindu said he is confident that a 0.07% charge would allow the firm to break even within a year and possibly generate operating profits, which he needs to fund investment in infrastructure, compliance, governance and skill-sets. He noted that SBI Pension Funds has run for about ten years and has operated at a loss despite delivering good returns, and said the PFRDA chairman has acknowledged that managers cannot keep making losses. He also argued that bond portfolios, which form the bulk of the firm's holdings, require active management and substantial tracking infrastructure.
On opening the government NPS corpus, which SBI Pension Funds shares with two other public-sector managers, Sharadindu said more competition is welcome but that the public-sector managers were assigned the government mandate by the government and have invested in infrastructure accordingly. He proposed that any rules be applied prospectively, leaving the existing corpus unchanged and opening choice only for future contributions. He warned that allowing employees to switch managers on the existing corpus would force large sales in an illiquid bond market at distressed prices, causing losses for those who stay.
On cost structure, Sharadindu said NPS is a retirement product distinct from exchange-traded funds, which he described as high-risk equity products, and that NPS's debt allocation offsets equity risk. He said the multiplicity of NPS costs cannot be consolidated into one expense ratio given its multi-stakeholder architecture, and that the additional costs are largely fixed and marginal. Regarding the proposed increase in distribution on-boarding charges from Rs125 to Rs200 and a persistency charge, he said eNPS suits digitally active urban users, but NPS must serve those who prefer face-to-face service, and the increase is intended to keep distributors profitable and engaged.
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