ANOTHER FLAW IN THE MANAGEMENT OF NPS FUNDS
Fresh bids have been invited to manage NPS Funds, It is expected that existing managers will bid to manage NPS fund but if any of the existing Manager refuse to do so then the transfer of existing accounts to newer players will have to done and there is no clarity how it will be done.
While the commercial proposal for pension funds to manage the National Pension Scheme (NPS) for private sector is opening on March 27, private players are concerned that the fee paid to them could be further capped. Added to this is the issue of license validity for five years.
All the eight pension funds managing private sector workers’ money in the NPS will be applying for re-selection. Bids for a five-year appointment to manage private sector pensions have been invited by the Pension Fund Regulatory and Development Authority (PFRDA).
A senior executive of a private sector fund manager said that though earlier the investment management fee was capped at 0.0102% per annum, the upper ceiling of the Investment Management Fees was later fixed at 0.25% per annum of the Asset Under Management (AUM).
“With the re-bidding process to begin, there is a fear that the fee structure may once again be capped at a lower level. Newer players may also want to bid, bringing down the fee for making themselves more attractive,” the official added.
According to PFRDA, as on December 31, 2013, NPS had 5.85 million subscribers with an AUM (Assets under Management) of Rs 42,204.63 crore.
Fund managers also said that when the fee structure was capped at 0.0102%, the NPS- private sector total AUM stood at around Rs 435 crore. “Later, when the fee structure was revised, the AUM grew at an exponential rate to more than double to cross Rs 2,600 crore in the end of February 2014. The subscribers also grew, showing that incentivising companies would lead to better sales,” an industry insider said.
NPS was formally launched in mid-2012 for private sector participation and three of the eight funds–LIC Pension Fund, SBI Pension Funds and UTI Retirement Solutions–also manage the pension corpus of present and former government employees.
The other five include HDFC Pension Management Co, ICICI Prudential Pension Funds Management Co, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund and DSP BlackRock Pension Fund Managers.
PFRDA has said that the licenses issued to the fund managers will be valid for a period of five years, post which there would be auctions again. According to an executive from a fund management firm, this will disrupt the popularity of NPS as a product and make it difficult for the customer.
“The product per se, are the same, though sold by different companies. Hence, the only differentiator will be the service quality. If one player has to keep on reapplying several times, the customer trust is affected and his/her NPS scheme manager may keep changing,” said a top official from a private fund manager.
In other countries like the US, once a license is issued, there is no validity period and is similar to the banking license issued in India. However, there are constant checks-and-balances that are imposed on these companies to ensure that there is no misappropriation of funds, malpractice or solvency-related issues. Penalties are also imposed to ensure that the companies conduct business in a fair and transparent manner.
NPS is the contributory pension scheme launched by the Union government in January 2004. It was made compulsory for all new government employees. Those in all non-government livelihoods, including those not in any organised sector, were invited to join from 2009.
PFRDA has said a sponsor, to be eligible for applying, must be in a registered financial services business, monitored by it or the Reserve Bank or Securities and Exchange Board of India or the insurance regulatory body. It must have a positive net worth (meaning, a profit) and be engaged in financial business for the preceding five years.
Though bids have been invited, industry experts said that the existing players may be able to retain their licenses. However, a section of fund managers are not very optimistic that all five (excluding the three) will continue to service NPS customers.
“If not, the transfer of existing accounts to newer players will have to done and there is no clarity on the processes involved in this,” added the chief fund manager of a private sector fund management company.