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Pension Funds Permitted To Invest In Basel-III Compliant Bank Bonds

PFRDAPension Fund Regulatory and Development Authority (PFRDA) has explicitly allowed pension funds to invest in Basel-III compliant additional Tier-I bonds issued by scheduled commercial banks. These will be eligible under investments under the debt category of the New Pension Scheme.

This move will be beneficial for both pension fund managers and public sector banks that face challenges in meeting the stringent capital requirements under Basel-III norms. This will not only expand investment avenues for pension fund managers but also enable psu banks to source long term pension money for meeting their capital needs.

It is also expected to bring down the capital infusion burden for the government as the majority shareholder in public sector banks.

PFRDA said that the risks involved in such instruments have been diluted and also the holding period for exercising the call options has been reduced.

PFRDA Released Draft Regulations For Pension Funds

PFRDAThe Pension Fund Regulatory and Development Authority (PFRDA) has released draft regulations on pension funds for the National Pension System (NPS).

As per draft guidelines, pension fund managers (PFMs) should have the ability to provide guaranteed returns through minimum assured return schemes as may be notified by PFRDA from time to time. However, PFRDA is still to notify this scheme, which may come at an extra cost for providing the guarantee as PFMs may not be able to offer guarantees at a fund management cost of 0.01% alone.

Draft also mandates that the pension fund shall ensure, at all times, separation between its staff responsible for distribution and sales, investments, settlement and book-keeping.

PFMs will have to pay an application fee of Rs 10 lakh for the government scheme and Rs 15 lakh for others. PFMs will also have to pay a registration fee of Rs 25 lakh. The annual fee would be the higher of Rs 10 lakh or 0.005% of assets under management.

PFRDA Seeking Tax Exemption On NPS Withdrawals

NPS Fund ManagersTo bring parity among Provident fund and NPS, Pension Fund Regulatory and Development Authority (PFRDA) has sought tax exemption for National Pension System (NPS) withdrawals. PFRDA has told the finance ministry that NPS withdrawals should be exempted from tax at the time of withdrawal just as PF withdrawals are at the time of retirement.

PFRDA has pitched for an EEE (exempt-exempt-exempt) tax structure for NPS on the lines of provident funds. Currently, there EET (exempt-exempt-tax) tax structure for NPS.

EEE offers tax exemption at every stage –initial contribution, accumulation and withdrawal.

PFRDA also said that parity on the tax front with PF coupled with a likely increase in the overall deductible saving limit under the section 80C could increase the popularity of NPS this fiscal.

Betting on these incentives in the budget, PFRDA is targeting a near three-fold increase in the NPS corpus. PFRDA is hoping that increase in number of subscribers and corpus will come primarily on the back of corporate segment, which currently accounts for just 5% of the corpus. Currently, nearly 90% of the NPS corpus comes from the contributions of central and state government employees.

PFRDA Framed Regulations For Intermediaries

PFRDAPension Fund Regulatory and Development Authority (PFRDA) have finalized regulations for regulating all intermediary institutions.

Intermediary institutions for which regulations are being framed include Point of Presence (POPs) and aggregators.

Some of the regulations already been approved by PFRDA include regulations for custodians, regulations for trustee bank and inquiry investigation appeal and adjudication regulation and regulation for centralized record keeping agencies.

PFRDA is targeting to increase the current number of subscribers under New Pension Scheme (NPS) from 68.48 lakh to cross 1.50 crores by the end of current fiscal. It is also targeting to increase its corpus from Rs 56,000 crores to cross Rs 1, 50,000 crores by the end of current fiscal.

HC Asked PFRDA To Evaluate HDFC Life’s NPS Bid

HDFC_LifeThe Delhi High Court has asked the Pension Fund Regulatory and Development Authority (PFRDA) to evaluate HDFC Life’s bid for the selection of pension fund managers. The Court has asked the PFRDA to evaluate the bid in accordance with steps mentioned in the request for proposal.

In other words, now PFRDA will have to evaluate HDFC Life’s bid along with other pension funds for the re-application process for NPS licenses.

Earlier in April, HDFC Life had filed a petition against PFRDA’s decision to disqualify it in the re-bid process for the private National Pension System (NPS). And after that Court had asked both parties to maintain status quo on the licenses.

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

PFRDA

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

PFRDA

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

insurance-pension-vs-nps

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

IRDA

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.