Hemant G Contractor, Chairman, Pension Fund Regulatory and Development Authority (PFRDA), tells Dipak Mondal and Sarbajeet K Sen that wide-ranging changes are in the offing in the National Pension System
Q- What are the changes being initiated in the National Pension System after the PFRDA Bill was enacted?
A- Well, the most notable change to come is in the form of new regulations. About 15 regulations have been framed. These clarify the roles and responsibilities of the various intermediaries in the NPS, including pension fund managers, points of presence (PoPs), aggregators and trustee banks and also the way in which the entire scheme will function. We are in the process of notifying them. The regulations will also specify punitive and investigative powers of the regulator.
Q- What are the steps being taken to popularise NPS?
A- That is a bit of a challenge right now. The level of awareness about NPS is still low. Since our products cater to the masses, we need to reach out the rank and file of the population. We will be helped by the fact the Swabhalamban Scheme will be part of the Jan Dhan programme from August 16 this year. When that is done there will be a lot of publicity through banks.
Q- Will you allow fund managers to market the schemes?
A- We are looking at it. Clearly at 0.1% fee they do not feel too encouraged to market these schemes enthusiastically. What are you doing to incentivise voluntary subscription? The growth in non-Swabhalamban, non-government schemes has been slow. In the corporate sector also, NPS is still not as popular as other competing products. Insurance companies advertise a great deal and people know about their products. Mutual funds have also started getting into this area and so their products are relatively better known. The fact that the fees they pay are also much higher puts us at a disadvantage. We are looking at pricing and distribution and will come out with changes.
Q- Does that mean the NPS fee structure is going to change?
A- We are looking at that and we hope to revise it very soon.
Q- In the previous bidding for PFMs (pension fund managers) one applicant bid 0.01% (of assets under management)? Do you think that was a mistake? Well, that was the process at that time. We had to accept the lowest bid. This time around one of the things we are looking at is to design a proper process for selecting fund managers so that we do not get into this kind of a situation again. When can we expect this?
A- We should be able to come out with this within a month.
Q- Would you also have more products?
A- We are looking at more products and investment options. There are some market segments that are not being catered to by anybody in a defined way, for instance, small businesses. The EPFO caters to establishments which employ 20 persons or more. So, businesses with less than 20 people are not being covered. Their number is large. That is one segment we could look at.
Q- You mentioned that insurance pension schemes and mutual funds are coming up with retirement funds. Is there a case for aggregating all of them under the pension regulator?
A- There was a lot of discussion on whether all such schemes should be under one regulatory roof or not. But the PFRDA Act very clearly says that EPFO will definitely be out of our purview. And some special schemes like the Dhanbad Coal Miners Fund or the Seaman's Provident Fund, which are also under separate laws, will not come under our purview. The Act also says that pension funds floated by insurance companies will run separately. What remains are retirement funds floated by mutual funds. At present, they are regulated by Sebi. But according to our Act all schemes other than EPFO and insurance schemes should be under one regulator.
Q- It is a bit of a grey area at the moment. We have taken up this issue with the government. What about tax issues related to NPS?
A- Tax issues are a major concern for us vis-à-vis our competing products. EPFO and PPF, for example, are EEE (exempt, exempt, exempt) products. However, NPS is an EET (exempt, exempt, taxable) product. This does deter some people from joining. We have taken this up very strongly with the government. The government has said it will examine our request. We hope there is something on this in the Budget.
Q- Do you think there is a need to make NPS more efficient?
A- Yes. We have been trying to streamline the delivery of services. We need to make it more subscriber-friendly.
Q- Will there be more flexibility for subscribers?
A- In fact, there have been requests from some quarters for partial withdrawal option from Tier-1 accounts in times of emergency. We have built that in these regulations and you will see it when they are notified. It is said that if you go to buy NPS, PoPs will sell you some other product that fetches them higher fees. They get the lowest commission on NPS. Naturally, they give priority to other products. We are trying to address this issue also. We have to look at how to make the whole distribution process more attractive so that they pay a little more attention to NPS.
Q- Can we see more pension fund managers?
A- There could be more fund managers. As the new regulations get notified, the existing ones will have to reregister themselves. There were only six PFMs allowed in the past. But we want to keep it a little more flexible.
Q- Will the composition of products also change?
A- We have a committee led by former Sebi Chairman G N Bajpai which is looking at enlarging the scope of investment and possible changes in investment patterns. It will suggest changes in investment patterns, including bringing in a few more instruments.
Q- What are the possible new instruments?
A- Well, Sebi recently come out with guidelines for Real Estate Investment Trusts (Reits) and Investment Trusts. The committee is looking at them.
Q- Recently, the government asked the EPFO to allot 15% funds for housing. Can there be something like that?
A- If a construction company floats a bond, we can invest, provided it meets the rating criteria. But if you are talking about direct loans to real estate companies, that will be not be done.
Q- Interest rates are falling and in a year or two their impact will be seen on returns. The government sector NPS will be particularly hit since it has high debt exposure. Do you think this will be a negative?
A- Yes. While everybody is happy when interest rates fall, we are unhappy. Clearly that will be a challenge. But it is a market-determined thing and the entire market will adjust accordingly. We will be giving good returns vis-à-vis the market. We cannot remain insulated from market trends.
Q- Can equity component in NPS go beyond 50% ?
A- We have allowed equity investment up to 50% in private sector schemes. A subscriber can specify the extent of money to be invested in stocks within this cap. But there is reluctance on the part of subscribers to opt for equities. The actual amount is in the order of 15% or so. People are still hesitant to put money in equities because they do not want to take chances with their retirement money.
Q- Are you thinking of hybrid products like insurance-linked NPS?
A- We are looking at some of these options. For example, we may tie up some insurance products with pension plans, but nothing has been finalised yet. Right now we are associated with the insurance industry in the sense that annuities have to be purchased from insurance companies registered with Irda. Currently, six insurance companies are providing annuities. We are looking at whether we can offer some add-on insurance products during the accumulation stage.
Q- Even if insurance becomes EEE, what about the annuity? Annuities are taxed.
A- Can NPS be completely tax free? No it can't be. Annuities are like pension every year. If the subscriber remains a taxpayer at that time, this income will get added and be taxed accordingly. If he is a tax-payer, he will have to pay.