As the chairman of the Pension Fund Regulatory & Development Authority (PFRDA), D. Swarup is the man who will oversee the New Pension Scheme for central and state government employees. Although Parliament is yet to pass the PFRDA 2005 Bill, Swarup says all systems are ready to go. End May, Swarup took time off his hectic schedule to explain to BT why he thinks the NPS is nothing short of a revolution in retirement planning. Excerpts:
Q. Are you happy with the way things have gone with the New Pension Scheme (NPS)?
A. Everything’s in place. We promised the Ministry of Finance that we will be ready for operation by June 1 this year, and we are already ahead of schedule. We are, in fact, ready to invest the money. We are now waiting for the release of individual data from the government.
Q. How are you deciding the investment strategy at this point?
A. We have a default policy where if the investor does not specify then it automatically opts for a 85:15 mix of fixed income instruments and equity.
Q. How different and financially savvy is the NPS going to be for contributing workers?
A. The NPS has some very efficient and great features woven into its makeup. For instance, it offers seamless portability, which means that a person will get a Permanent Retirement Account Number (PRAN) from the central record-keeping agency (CRA) like the PAN card and it would work in any geographical location and also take care of change in jobs. So, the place of work will not matter and this will be transferred to wherever the person is working. In a financial sense, the beauty is that there will be very minimum administration charges: there will be no exit and entry load. Also, the charges will be low as the scale of investments is very high and we have gone through open bidding process, where we have got very competitive rates. Our charges will be about 3-5 basis points. In case of administration charges, the government is willing to foot the bill. Elsewhere, the employer can offer to pay for it, depending on how it wants to structure employee benefits. Initially, we will allow one switch between schemes in the beginning as we want to be very conservative about it. Maybe once the market matures we will think of other options.
Q. Will you appoint more fund managers?
A. We have already selected UTI, SBI and LIC. In time we will consider licensing more pension funds, including private ones.
Q. How can the New Pension Scheme work for a private organisation?
A. It will not apply to private organisations already under the purview of EPFO, but on a voluntary basis, in time to come, they can be part of the NPS—as long as they fulfill their existing obligations.
Q. Are you worried that there might be some glitches as the Bill is yet to be passed?
A. I am pretty optimistic as all problems have been ironed out. And we have been advised by the government through executive instructions to regulate the scheme through contractual arrangements between PFRDA and the fund managers.
Q. Is taxation an issue for the NPS?
A. It’s a concern, but we have taken up this issue with the government and feel that some sort of level playing field will come into place between PPF, EPF, etc. And when people see how NPS is working and actually beginning to bear fruit, in terms of the returns on investment, there will be a natural pressure for parity.
Q. How sure are you of NPS being a better performer than existing schemes and that many will seek voluntary participation?
A. Wait for exactly a year till we declare results. We are reasonably sure that the way the money will grow in NPS will surpass the returns for employees in other schemes. In fact, the success of NPS is already putting pressure on other schemes to appoint fund managers through a transparent bidding process as well. In fact, the day is not far when probably the insurance companies that offer pension plans will think of joining us. The demand for pension is huge in the country and a survey conducted by IIEF showed that 20 million people want to join NPS. We are targeting a corpus, not unreasonably, of $300-billion in another 10 years. Going forward, in time, I am of the view that there cannot be separate systems for pensions— a mainstream has to emerge. Let people decide which system is better.
Q. How do you think NPS will impact the capital and debt market?
A. It will deepen the debt market and the entry of pension funds will lend stability to equity markets, too.