'œAround 80 million people will join new pension scheme in five years'?

It’s going to add another powerful tool to your retirement arsenal. New pension products that will be overseen by Pension Fund Regulatory and Development Authority (PFRDA) will soon see the light of day. The regulator has already invited bids from fund houses; and 21 asset management companies have expressed a keen interest in managing the corpus. In a conversation with BT’s Manu Kaushik, the former Budget and Expenditure Secretary in the Ministry of Finance, and now, Chairman of PFRDA, Dhirendra Swarup, talks about what’s in store for you.

Dhirendra Swarup

When do you expect the PFRDA Bill to get clearance in Parliament?It is likely that the Bill will be taken up in the next (Budget) session of Parliament. Meanwhile, the government has authorised us, through an executive order, to go ahead and open the schemes for private sector employees. According to the current terms, we will sign contracts with the fund managers which are enforceable under the Indian Contracts Act. However, once the Bill gets passed, PFRDA will get statutory backing to impose penalties on the erring parties (fund houses).Who will benefit from these plans?Today, there is no pension scheme available for the unorganised sector and self-employed individuals, who constitute a major chunk of the country’s total workforce. According to a survey, around 80 million people would join the New Pension Scheme (NPS) over the next five years.How will you distribute your products and what business model are you working on?There will be a direct distribution model with no selling agents and no marketing overheads in our case. The scheme will be supported by a country-wide network of point of presence (POP) centres that will comprise banks, post offices and other existing channels. These centres will collect contributions from subscribers and transfer them to the designated fund managers. Since the fund managers will not have any direct contact, the point of presence centres will have an electronic connectivity with the managers.How many products will be available to individuals?We will be coming up with 4-5 investment options. A Deepak Parekh-led committee is deliberating this issue and is likely to submit its report soon. Products will have varying degrees of exposure to equity and fixed-income instruments. Investors will also have a default option, which will apply to the individuals who do not choose their type of asset mix. Where and how will a fund manager invest the corpus? There will be no individual stock picking; we are mandating that investments should be made only in index funds like—Nifty 50 or BSE 30. In the case of debt instruments, fund managers can opt for AA-rated or above corporate bonds and government securities.

Click here to Enlarge The Pension PrimerPFRDA will soon unveil its pension products for subscribers. Here’s a sneak preview of what’s going to hit the market. The new pension scheme will offer four schemes—safe, balanced, growth and a gilt product. The funds will invest in equities, the sovereign guaranteed government securities and other investible-grade bonds. Says Swarup: “We want to provide a wider choice to subscribers as it’s not available as of now.” PFRDA has designed these products factoring the age, background and risk appetite of the subscribers. For instance, the growth option, which will predominately invest in equities, is tailored for young investors with a high risk appetite and a longer time horizon. On the other hand, low risk investors can opt for plans that have lower equity investments in their portfolios. Advertisement Read More

What is the response of fund managers towards the scheme?During the bidding process, 21 firms expressed an interest to manage the pension fund assets. We are evaluating their application at the moment, and based on technically suitability, 5-6 fund managers will be shortlisted by the first week of February.What are the charges that subscribers will have to bear?In the case of existing three pension fund managers—SBI Pension Fund, UTI Pension Fund and LIC Pension Fund—the fee ranges between 0.03 and 0.05 per cent. We expect the charges to be in line with these rates. This is substantially lower than the mutual fund and insurance industry, where the average charges are around 2.25 per cent.What are the advantages of NPS over the existing pension funds offered by private players?Unlike other existing plans, if any individual finds his returns on investments unsatisfactory, the scheme offers an option to switch between fund managers and funds without any exit or entry load charges. However, there will be a nominal transaction-based charge. In addition, the subscribers are not bound to deposit money on a regular basis. PFRDA will fix a minimum annual amount that can be deposited as per convenience of the individual.In order to reach the maximum subscribers, what promotional strategies have been finalised so far?We are planning to launch a campaign to inform people about the advantages of saving for retirement through information booklets, brochures and advertisements.