Thousands of crores of provident and pension fund money are waiting to be deployed by advisors on Dalal Street. Enticed by the hope of higher returns (albeit, with higher risk) and lowering costs, the government's provident and pension funds are gravitating towards professional advisors, who will direct a slice of this stash into equities. Recently, the Pension Fund Regulatory & Development Authority (PFRDA) selected three advisors, State Bank of India, UTI Asset Management and Life Insurance Corporation of India, to manage its pension funds under the New Pension System (NPS).
The NPS was formed in August 2003 to cover government employees joining the services from January 1, 2004. The formation of the NPS it is felt will arrest the increasing unfunded pension liabilities of existing government employees.
The interesting part is that for the first time fund managers will be mandated to invest a part of the initial Rs 2,000 crore of the PFRDA's assets into equities because under NPS investment is yet to be made. However, these fund managers will not assure any returns on the investments they make in the market. Says Jaydeep Bhattacharya, Chief Marketing Officer, UTI Asset Management: "This will be the first time that pension money from the public will be allocated to equities. The fund is yet to start and we are currently in the process of forming a new company for managing money from the PFRDA." "The bidder quoting the lowest fee will be given the larger chunk in the corpus. However, of the total corpus not more than 10 per cent is expected to be invested into equities," says Krishnan Sitaraman, Head (Fund Services & Fixed Income), CRISIL, which helped PFRDA in selection of the fund advisors. "We evaluated the advisors on a quantitative and qualitative basis before selecting them on a commercial basis," adds Sitaraman.
In the initial screening process, only public sector undertakings that had a minimum of five years' experience of managing an equity as well as debt corpus of more than Rs 10,000 crore were shortlisted. CRISIL used its fund governance process quality rating product (the product was initially developed to rate mutual fund houses) for selecting the financial advisors.
CRISIL used a similar process in selecting ICICI Securities and the State Bank of India (SBI) to manage the Rs 40,000 crore of the Coal Mines Provident Fund Organisation (CMPFO). The second-largest provident fund organisation in the country in terms of assets under management has divided its corpus between the two banks; ICICI Securities will manage the provident fund corpus of Rs 32,000 crore and the pension fund corpus is SBI's baby. Says Denzil Fernandes, Senior Vice President, ICICI Securities: "Apart from monitoring the ongoing fund, we have already invested Rs 3,500 crore in the fixed income market." Despite the government approving an investment of 5 per cent of the corpus in equities, the CMPFO has so far not mandated ICICI Securities to invest in equities. The investment bank may not need to do so as the CMPFO's objectives are being met: Costs are down by a sixth, and according to market men, ICICI Securities, which had a mandate to generate an 8.5 per cent return, has surpassed that target by a full percentage point. Says CRISIL's Sitaraman: "Going ahead the compulsion to cut costs and generate good returns in a low-interest rate regime will force pension funds to go the professional way."
CRISIL is already in talks with big daddy EPFO (Employees' Provident Fund Organisation), which manages over Rs 1.5 lakh crore of assets. That's bigger than the total equity assets of the total Indian mutual fund industry.