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NPS Likely To Post Drastic Fall In Returns For FY’14

New-Pension-SchemeThe New Pension Scheme (NPS), on the contrary to its impressive double-digit returns generated in FY’13 is expected to post a drastic fall in returns for FY’14.

Last year, NPS having the lowest fund management charge, had generated the highest returns. High bond yields this year would impact the returns for investors in the pension scheme for FY’14. The interest rate is inversely proportional to the price of a bond. If the yield of a bond goes up, its price falls. In FY’13, the yields had fallen, so bond prices went up. Therefore, there were mark-to-market (MTM) gains in addition to interest income. From June 2013, yields started rising. So, while, interest income would be there, there would be more MTM losses. Bond prices and interest rates are inversely proportional.

The weighted average returns for the government debt (G-sec) scheme for the private sector would be around 2-3% for FY’14 compared to 13.52% generated in FY’13. Similarly, the corporate debt scheme would give 5-6% return compared with 14.19% in FY’13, while the returns on central government and state government schemes would be in the range of 2-3% compared with 12.39% and 13%, respectively, in FY’13.

However, with the stock market doing well this year, the equity scheme for the private sector would give around 13-14% return, compared with 8.38% in FY’13.

Interest rate movements are cyclical and since NPS is a 20-year product, the losses get averaged out. With its lowest charges, NPS is likely to generate phenomenal returns over a longer period.

NPS was introduced by the central government in January 2004 for new entrants and was subsequently extended to all citizens from May 1, 2009. Pension Fund Regulatory and Development Authority (PFRDA) has chosen eight fund managers to manage NPS for private sector –SBI pension funds, UTI retirement solutions, LIC pension fund, Reliance capital pension fund, Kotak Mahindra pension fund, ICICI Prudential pension funds management, HDFC pension management and DSP Blackrock pension fund managers.

Under NPS, you can choose your fund manager and your investment option. In case if you does not want to exercise a choice, your money will be invested as per the ‘auto choice’ option, where money will get invested in various schemes as per your age.

NPS offers two options to invest money. The first one is ‘active choice’, where you can decide the asset class and their percentages.

Asset class ‘E’ invests predominantly in equity market instruments. Asset class ‘C’ invests in fixed income instruments other than government securities and asset class ‘G’ invests in government securities. You can choose to invest your entire pension wealth in ‘C’ and ‘G’ asset classes and up to a maximum of 50% in ‘E’ under ‘active choice’ option. You can also distribute the pension wealth across E, C and G asset classes, subject to conditions.

The other option is ‘auto choice’, which offers an easy option for individuals who do not have the required knowledge to manage their NPS investments. Under this, the investment will be made in a lifecycle fund.

According to this, at the lowest age of entry (18 years), it will entail investment of 50% in ‘E’ class, 30% in ‘C’ class and 20% in ‘G’ class. These ratios of investment will remain fixed for all contributions until the individual reaches the age of 36 years. From age 36 onwards, the weight in ‘E’ and ‘C’ class will decrease annually and the weight in ‘G’ class will increase annually till it reaches 10 % in ‘E’, 10% in ‘C’ and 80% in ‘G’ class.

PFRDA Bill Got President’s Assent


President Pranab Mukherjee has given his assent to the pension bill, which provides for investment of funds in equity market and opens the sector to up to 26% Foreign Direct Investment (FDI).

The long pending Pension Fund Regulatory and Development Authority (PFRDA) bill was passed by parliament on September, 6, 2013.

The legislation provides subscribers a wide choice to invest their funds including for assured returns by opting for government bonds as well as other funds depending on their capacity to take risk, a provision that came from opponent’s of the legislation.

It pegs the FDI in pension sector at 26% or such percentage as may be approved for the insurance sector, whichever is higher.

Now the PFRDA has become a statutory authority. Till now, PFRDA was an interim regulator. PFRDA was established by the government in August 2003.

Under the law, subscribers of New Pension Scheme (NPS) can opt for minimum return schemes or higher risk based returns on investments.

The corpus of NPS stands at about Rs 35,000 crores. It has 52.83 lakh subscribers including those of 26 state governments.

PFRDA Against Partial Withdrawal From NPS


The Pension Fund Regulatory and Development Authority (PFRDA) are not in favour of partial withdrawal of funds from National Pension System (NPS).

National fund managers, however, feel policymakers would push a partial withdrawal in cases of emergency conditions, but PFRDA believe withdrawing in the middle would not help pensioners getting the right benefit.

PFRDA also said that it have no such consideration. PFRDA, however, agreed that it has received some representations in cases of emergency medical conditions, and it is looking into it.

At present, partial withdrawals are not allowed in NPS. NPS is run by the finance ministry, with no contribution from the government. There is no assured benefit to subscribers and the return is completely market driven.

The finance ministry has proposed shifting EPS beneficiaries to NPS. Unlike NPS, EPS is an assured return scheme but NPS, as the cheapest financial product with no hidden cost, has given 12-15% return in the non-government sector for the last two years.

However, states like West Bengal and Tripura hasn’t yet joined the NPS since the returns are not assured but rest 26 states have already joined NPS.

Pension Products Not At Par With NPS: Say Insurers


Pension products might take a little longer to be counted among big contributors to the portfolio of life insurers. These used to be 25% of the total offerings and now down to single digit.  While life insurers have started introducing new products in this segment, insurers admit they are at a disadvantageous position, compared to the New Pension System (NPS) by the Pension Fund Regulatory and Development Authority (PFRDA).

In January 2012, the Insurance Regulatory and Development Authority (IRDA) had said that pension products would have to guarantee an assured benefit in the form of a non-zero rate of return, which would need to be disclosed upfront. Further, it said that annuity had to be bought from the same company.

These regulations had led to slower approvals of pension products. Initially, there was a dearth of pension products in the market. However, the gap filled after some private life insurers launched pension products.

Most life insurers feel that the guarantee element has made pension products different from NPS, while their fundamental structures are the same.

Unlike NPS, the service tax is applicable to pension products.

Insurers say that reasons which are restraining life insurers from competing effectively in the pension space include, insistence on annuity being bought from the same insurer, no partial withdrawals allowed etc.

With the current regulations in place, insurers are not comfortable offering non-zero guarantee for pension.

Insurers had shied away from introducing pension products due to the guarantee return requirement. NPS is not mandated to offer these returns. And that skews the pension playing field. So selling pension on the insurance platform is that much more difficult and requires the building of significant pool, say insurers.

Insurers say that they also have to maintain a conservative strategy in terms of investment, to give these non-zero returns.

Insurers say that until these challenges are addressed, pension growth is likely to remain muted.

Life insurers are also planning to take up this issue with the IRDA. Insurers will request the IRDA to make pensions at par with NPS.

However, insurers are hopeful that these issues will get resolved as they move ahead.

With the right nudge, insurance companies can make a significant contribution in pensions since they have the distribution backbone to reach these products to a large audience, say insurers.

More Debate Needed On Financial Code: T S Vijayan


There is a need for a debate on the Indian Financial Code (IFC), according to T S Vijayan, Chairman Insurance Regulatory and Development Authority (IRDA).

Vijayan said that a standardization of intermediation should be brought in by the proposed financial code.

IFC is a draft bill recommended by the Financial Sector Legislative Reforms Commission (FSLRC) in its report to the government.

It is recommended that the existing regulators –SEBI, FMC, IRDA and PFRDA – should be merged into a new unified agency.

If the financial code comes into force, Hyderabad will lose its only regulator and IRDA would not be there, said Vijayan.

Vijayan said that there should be no ambiguity in various recommendations of the FSLRC, such as principle-based regulation and modalities on capital flows.

C. K. G Nair, secretary, FSLRC said the proposed code is for ‘tomorrow’s India’ as the economy is expected to touch $15 trillion by 2030 from the current $2 trillion.

PFRDA Tightens Audit Norms For Fund Managers


The Pension Fund Regulatory and Development Authority (PFRDA) have tightened rules for fund managers, making it mandatory to get their investments and fees certified by auditors. The move aims at raising accountability and lowering chances of malpractices with long term savings of employees.

The new rule mandates auditors to certify that PFMs’ investments have been valued in accordance with the guidelines issued by PFRDA and transaction and claims raised by different entities are in accordance with the prescribed fee.

Recently, PFRDA had decided to appoint a consultant to review the performance of pension fund managers (PFMs) as there were complains of accounts not being transparent.

Moreover, the subscribers were not able to trace where their money was invested and how much return it yielded.

The move gain significance in the wake of the regulator allowing PFMs to invest directly into equities with a cap of 5% in a single company.

PFRDA said that the balance sheet and revenue account of the New Pension Scheme (NPS) must comply with PFRDA’s guidelines and the accounting standards notified under the Companies Act.

The auditor now has to submit a separate report called NPS scheme-detailed audit report (NPS-DAR) along with scheme audit report accounts for a particular financial year.

The audit report will have to be approved by the board of PFM. The board of directors of PFM will also have to submit a ‘compliance report’ within two months of the receipt of detailed audit report.

PFRDA Allowed NPS Subscribers Lump Sum Withdrawal On Exit


Pension Fund Regulatory and Development Authority (PFRDA) has allowed investors in the New Pension Scheme (NPS) to withdraw lump sum amount at the time of their exit, as against the current practice of ‘phased withdrawals’ every year.

The replacement of ‘phased withdrawal’ with ‘deferred withdrawal’ was taken after PFRDA received feedback from various stakeholders.

Stakeholders informed PFRDA that subscribers should be given a specific option to defer or time the entire lump sum withdrawal (maximum 60%) at the time of exit from NPS.

This would be a better option than forcing subscribers to choose a certain percentage each and every year while opting for the ‘phased withdrawal’ option, including the year in which they are exiting the system.

Under the ‘deferred withdrawal’ facility, the subscribers at the time of exit from NPS can exercise the option to defer withdrawal of eligible lump sum withdrawal and stay invested in the NPS.

However, no fresh contributions will be accepted and no partial withdrawals will be allowed during such a period of deferment.

The subscriber can withdraw the deferred lump sum amount at anytime before attaining the age of 70 years by giving a withdrawal application or notice.

If no such notice is given, the accumulated pension wealth would be automatically monetized and credited to his bank account on attaining the age of 70 years.

As on March 2, NPS manages a corpus of over Rs 28,400 crores of 44.93 lakh subscribers. Around 2 lakh subscribers are from the private sector while 27 lakh are from central/state governments.

Around 15.79 lakh subscribers are served by NPS Lite, which is designed to insure ultra-low administrative and transactional costs.

NPS has been extended to all citizens of India with effect from first May 2009.

PFRDA Capped NPS Equity Exposure At 5% in Sponsor Group Companies


The Pension Fund Regulatory and Development Authority (PFRDA) have capped the equity exposure of New Pension Scheme (NPS) to 5% in sponsor group companies and 10% in other blue-chip companies. The move is aimed at preventing concentration of risks.

The PFRDA has also allowed Pension Fund Managers (PFMs) to park money in fixed deposits of more than one-year maturity of financially sound banks as part of their investment in fixed income instruments like investment grade bonds of corporate, infrastructure firms and municipalities. Banks should have a minimum net worth of Rs 500 crores and track record of consecutive net profit, a capital adequacy ratio of 9% and net non-performing ratio of less than 5% of advances in the last three years.

The change in rules has come amid demand from PFMs for widening the investment horizon.

Earlier, fund managers were allowed to invest only in equity index funds that replicated the sensex and Nifty. But the PFRDA had to change the investment rules as investing in equity indexes of mutual funds have become costlier owing to 1.5% expense ratio charged by fund houses.

In a notification, PFRDA has said that PFMs are allowed to invest in shares of companies which are listed in Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and on which derivatives are available or are part of the sensex and Nifty indices.

Investment in any equity stock of a sponsor group should be restricted to 5% or the paid up equity capital of all the sponsor group companies or 5% of the asset under management (AUM) of the NPS scheme, whichever is lower.

In case of non-sponsor group companies, the PFMs are allowed to invest up to 10% of paid up equity capital or AUM, whichever is lower.

Investment in Initial Public Offering (IPO) or Follow-on Public Offering (FPO) is not allowed. Also, investments in unlisted companies are not allowed.

PFMs are barred from short sale and carry forward transactions or engage in badla finance.

PFRDA has not raised the overall equity investment limit of 50%.

At present, the NPS corpus is managed by PFMs promoted by LIC, UTI AMC, SBI, ICICI bank, Kotak Mahindra Bank and Reliance Capital.

The total NPS corpus has grown to around Rs 28,000 crores at the end of February 2013 since its inception in January 2004. The corpus has grown 77% on year-on-year basis to Rs 15,163 crores in 2011-12 and 83% in 2010-11.

The NPS initially enrolled new central government employees and subsequently rolled-out to employees in 24 states, PSUs, corporates and even the unorganized workers.

Higher returns than Employee’s Provident Fund Organization (EPFO) and Public Provident Fund (PPF) have lured employees in private companies to enroll in NPS.

Since December 2011, about 400 corporate entities have enrolled new and existing staff under the NPS.

LIC Selected as Default NPS Annuity Service Provider


Pension Fund Regulatory and Development Authority (PFRDA) has chosen state-owned Life Insurance Corporation of India (LIC) as default annuity service provider for subscribers exiting from New Pension System (NPS) and seeking withdrawal of accumulated pension wealth. It will be applicable for all variants of NPS.

PFRDA has empanelled seven Annuity Service Providers (ASPs) for providing annuity services to NPS subscribers.

While subscribers are required to select an empanelled ASP along with an annuity scheme from those offered by the chosen ASP at the time of exiting from NPS, PFRDA has now decided to assist subscribers by providing a default option.

The default scheme offers annuity – a policy by an insurer designed to provide payments to the holder at specified intervals- for life with a provision of 100% of the annuity payable to spouse during her-his life on death of annuitant.

Besides LIC, other ASPs include SBI Life, ICICI Prudential Life, Bajaj Allianz Life, Star Union Dai-Ichi Life and Reliance Life.

Under the provisions of NPS, a maximum of 60% of corpus accumulated at the time of exit, which is normally on the attainment of 60 years of age, can be withdrawn but a minimum 40% of corpus has to be utilized for purchasing an annuity from one of the empanelled ASPs.

The NPS was introduced for the new recruits who joined government service on or after first January 2004. From May 2009, the NPS was opened up for all citizens in India to join on a voluntary basis.

At the end of 2012, over 42 lakh subscriptions were enrolled with a corpus of over Rs 26,000 crores.

PFRDA Pushes Corporate to Offer NPS


The race between two state-sponsored retirement savings schemes seems to be picking up pace. With the mere Rs 6,500 monthly wage ceiling for mandatory provident fund contributions, the interim pension regulator, Pension Fund Regulatory and Development Authority (PFRDA) is urging corporate employers  to join the National Pension System.

Most workers are already outside the mandatory PF net as minimum wages in most sectors is much above Rs 6,500 per month.

Instead, the NPS offers higher returns and is a much more efficient scheme for corporate employers, said PFRDA.

In a recent meeting with industry chambers, finance minister, P. Chidambaram, had also asked them to push their member companies to join the NPS.

Already, 350-odd companies, including Reliance group companies, Wipro, and ICICI Bank have begun to offer the defined contribution based pension scheme to their employees.

Compared to 8.25% interest rate offered by EPFO, the NPS gives average returns of 14% in equity and corporate debt and over 10% for government bonds making it more optimum choice for workers.

Moreover, tax benefits are also available for the scheme, which puts it at par with other similar retirement schemes.

Launched on first May 2009, the NPS for private citizens has over 2 crores subscribers and a corpus of over Rs 1,000 crores.

The low wage cut-off for compulsory provident fund deposits has already become a cause of concern for Employee’s Provident Fund Organization (EPFO) that is concerned over dipping membership that is resulting in a fall in contributions.

With minimum wages in most states over the Rs 6,500 per month ceiling, formal sector workers have begun to slip out of PF net.

But analysts believe that it is early days for the NPS to claim to be a substitute for the EPFO as it is an untested product. Companies do not consider the NPS a substitute to the EPFO, but they look at it as a layer over and above the provident fund. They also say that substitutability will happen when there is portability between the two products. And given the overarching powers of the EPFO, no employer would suddenly want to stop PF contributions and become a defaulter.