New pension scheme for MFs from April 1

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The proposed opening up of the New Pension Scheme (NPS) to the organised and unorganised sectors from April 1 this year had kindled hopes among asset management companies (AMCs) of bolstering their business at a time when they have been coping with a poor appetite for equity offerings and playing second fiddle to insurance companies.
Such hopes are quickly getting doused. There is a growing realisation now that it may be a while before fund houses can take a bite of the pension cake. Sixteen years after it was first conceived, India is just weeks away from finally having a pension system that is meant for private individuals – whether employed or unemployed. From April 1, any individual will be able to start a New Pension System (NPS) account and start building a nest egg.
The Pension Fund Regulatory and Development Authority (PFRDA) has mandated six mutual fund houses to manage pension monies that Invest India Economic Foundation (IIEF), a think thank specialising in pensions, estimates could be close to $300 billion by 2019. Although fund houses are very upbeat about the prospects of the whole enterprise, their optimism is largely based on the premise that the ‘saving for pension’ habit finds roots among average Indians.

Yesterday once more?
Although this is the first time that a cheap pension product will be available to average Indians, mutual fund (MF) houses and insurance companies have been selling such products for several years now. Products from insurance companies enjoy a fair degree of popularity, but only among the more upper middle-class Indians. They are beyond the reach of the man on the street — the fruit seller or the neighbourhood grocer.
For mutual fund houses, it has been a dismal scenario. There are two schemes currently available in this segment (offered by Templeton and UTI, launched in the ’90s), but put together these two schemes have only Rs 600 crore between them. But industry watchers are hopeful that the experience this time should be different.

Who will bell the cat?
“The government and the pension regulator will have to spend generously to popularise the pension-for-all scheme,” says Aditya Agarwal, managing director for fund research firm Morningstar. “However, I am hopeful that as financial literacy rises, it will find favour,” he said. PFRDA chairman D Swarup says the regulator is committed to marketing the product through large ad campaigns. He points out that PFRDA had launched its first advertisement on NPS recently, but had to discontinue it due to the election code of conduct. He is hoping that banks authorised for collecting pension monies will also do their bit, in pursuit of valuable fee income. Since MFs do not come in contact with the end customer in NPS (government will allot them a part of the collected corpus), they are not expected to splurge on advertising. But since the investor has the choice to select his asset manager, MFs would do well to raise awareness about the product, financial planners say. In addition to this, fund managers should take the effort to educate the investor in forums like investor meets, as PV Subramanyam, a veteran financial trainer who has been advising individuals on their pension requirements, puts it.

Where’s the law?
The other major issue with NPS, for some, is its legal standing. Officials in the six MFs — UTI Retirement Solutions, SBI, ICICI Prudential Life Insurance, Reliance Capital, IDFC AMC and Kotak Mahindra AMC — agreed that NPS has its basics in place. But at least one chief executive pointed out that with the PFRDA Bill yet to be approved by Parliament; the pension watchdog’s punitive powers have been restricted as compared to other regulators such as Sebi or Irda.
“If I buy pension from an insurance company or a fund house and I have complaints, I can seek help from Irda or Sebi. But if I have issues with NPS whom do I turn to? PFRDA does not have any legal standing,” the official said. He pointed out that the current NPS is, at best, a private contract between the government and applicant. But Mr Swarup counters this, saying that the question is “absurd,” considering that the government has vested powers with the regulator which provides it with enough teeth.

Right idea wrong time?
Market experts say that India may not have timed it worse for launching a new pension plan with the government unable to change any laws or spend on ads and the fall in market draining all appetite for investment products. But IIEF director and renowned pension expert, Gautam Bharadwaj, disagrees. “We are nearly at the bottom end of the market and investing at these levels should help in delivering good returns in the long term,” he says. It would not be far-fetched to expect a better performance than those from India Post or bank deposits, that should help popularise the product in the long term, he adds.

Other experts point out that the upcoming pension plan is a product with the longest tenure in the Indian markets (30-40 years) and is still the cheapest managed product available. (NPS money is to be managed at 0.09 paisa per Rs 100 that is cheaper than even liquid mutual funds.) They feel that this along with portability (investors can change fund manager at no cost), a wide choice available in selecting where the money is invested and transparency should help in the product finding favour in due course.

For years, insurance companies have been stealing the thunder from fund houses for mobilising investments from the public. If all goes according to the script, this may just be the one channel where mutual funds may be able to beat insurance companies at their own game.

Source-Economic Times
March 2009

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