Key Takeaways
- • PFRDA chairman Hemant Contractor said a request for proposal will soon be issued inviting applications from fund managers to manage National Pension System (NPS) schemes, and the regulator may adopt a new selection method.
- • PFRDA is reworking its bidding process because the 0.01% fund management fee set by Reliance Capital Asset Management is considered unsustainable, with SBI Pension Funds' Shailendra Kumar saying "all the fund managers are bleeding."
- • A committee headed by G.N. Bajpai recommended a fixed-plus-variable fee model, with a low fixed fee in bids and a variable component tied to performance metrics such as relative returns.
- • PFRDA has not yet decided whether to continue the auction system, with Contractor saying "we have to take a final call" on that question.
- • Seven pension fund managers currently operate under NPS, and an eighth, Birla Sun Life Pension Management, has yet to commence business.
Summary
India's Pension Fund Regulatory and Development Authority (PFRDA) will soon invite applications from pension fund managers (PFMs) to bid for managing National Pension System (NPS) schemes and may use a new method to select them, according to PFRDA chairman Hemant Contractor, who spoke on the sidelines of a Confederation of Indian Industry (CII) insurance conference in Mumbai. Livemint reported the development.
The central industry concern is the fund management fee. Regulations for pension fund managers were notified in May 2015, and existing PFMs were required to apply for fresh licences within six months. When NPS was opened to the private sector in 2009, PFRDA selected managers through an auction intended to secure the lowest fee. UTI Asset Management made the lowest charge at 0.0009%, and rivals agreed to match it, but financial sustainability proved a serious challenge. In 2012, under then-chairman Yogesh Agarwal, the authority abandoned bidding; it was reintroduced in 2014, when Reliance Capital Asset Management offered a fee as low as 0.01%, which became the new private-sector benchmark.
PFMs now say that fee is unsustainable. "At the current fund management fee, all the fund managers are bleeding," Shailendra Kumar, managing director of SBI Pension Funds Pvt. Ltd., said. Contractor said PFRDA is "reworking the selection process to make sure that unsustainable fees are not bid again," and that the regulator must decide whether to continue the auction system.
A committee headed by G.N. Bajpai, which reviewed NPS investment guidelines, described the 0.01% fee as very low and concluded the bidding system had created "a race to the bottom" with uneconomical bids. Its report suggested a fixed-plus-variable fee model, under which managers would be incentivized to quote the lowest fixed fee, while the variable fee would depend on performance indicators such as relative returns.
Seven PFMs currently operate under NPS: HDFC Pension Management Co., ICICI Prudential Pension Funds Management Co., Kotak Mahindra Pension Fund, LIC Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds and UTI Retirement Solutions. Birla Sun Life Pension Management is an eighth licensed manager that has yet to commence business. Private-sector subscribers can choose among government securities funds, fixed-income funds other than government securities, and equity funds, with equity exposure capped at 50%.
The central industry concern is the fund management fee. Regulations for pension fund managers were notified in May 2015, and existing PFMs were required to apply for fresh licences within six months. When NPS was opened to the private sector in 2009, PFRDA selected managers through an auction intended to secure the lowest fee. UTI Asset Management made the lowest charge at 0.0009%, and rivals agreed to match it, but financial sustainability proved a serious challenge. In 2012, under then-chairman Yogesh Agarwal, the authority abandoned bidding; it was reintroduced in 2014, when Reliance Capital Asset Management offered a fee as low as 0.01%, which became the new private-sector benchmark.
PFMs now say that fee is unsustainable. "At the current fund management fee, all the fund managers are bleeding," Shailendra Kumar, managing director of SBI Pension Funds Pvt. Ltd., said. Contractor said PFRDA is "reworking the selection process to make sure that unsustainable fees are not bid again," and that the regulator must decide whether to continue the auction system.
A committee headed by G.N. Bajpai, which reviewed NPS investment guidelines, described the 0.01% fee as very low and concluded the bidding system had created "a race to the bottom" with uneconomical bids. Its report suggested a fixed-plus-variable fee model, under which managers would be incentivized to quote the lowest fixed fee, while the variable fee would depend on performance indicators such as relative returns.
Seven PFMs currently operate under NPS: HDFC Pension Management Co., ICICI Prudential Pension Funds Management Co., Kotak Mahindra Pension Fund, LIC Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds and UTI Retirement Solutions. Birla Sun Life Pension Management is an eighth licensed manager that has yet to commence business. Private-sector subscribers can choose among government securities funds, fixed-income funds other than government securities, and equity funds, with equity exposure capped at 50%.
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