PFRDA likely to make it 50% and allow employees to pick private fund managers
Government employees might soon be given a choice to invest as much as half their contribution towards pension funds in the stock market, against 15 per cent allowed now.
These employees are also likely to get an option to select fund managers from private entities, against the current norm of only public sector fund managers.
The Pension Fund Regulatory and Development Authority will invite stakeholders’ comments on the proposal in a month’s time, after which bids will be called for fund managers based on ‘significantly flexible regulations’.
“A lot of changes are going to be made in terms of choices we make available to the government employees over the choice of the investment pattern and fund manager.
"We are on the verge of finalising it,” said Hemant Contractor, chairman of PFRDA.
Contractor added the idea is to give government employees an option to invest up to 50 per cent in equities.
PFRDA will invite bids to appoint pension fund managers to manage the Rs 1 lakh-crore (Rs 1-trillion) corpus under the National Pension Scheme.
“Our document is ready. We’ll put it up for stakeholders’ comments in a month’s time on this. Investment in equities gives better returns in the long run.
We are hopeful it will be approved by the government,” said Contractor.
Of the Rs 1 lakh-crore assets under management of NPS, 90 per cent of that falls under the central and state government scheme.
NPS was made available to all citizens from 2009 onwards on a voluntary basis.
But, all the central government employees joining the service from January 1, 2004 had to opt for NPS.
The proposal to allow private fund managers to manage state funds will allow government employees to opt for private fund managers.
The fund managers will likely be appointed for a five-year term instead of three years at present.
The move is aimed at providing confidence to pension fund managers to take long-term investment decisions, which could bring in greater returns to subscribers.
Although fund managers for private sector employees are allowed to invest up to 50 per cent corpus in stocks, they usually invest only 17-18 per cent in equities.
On the other hand, government fund managers who have a ceiling of 15 per cent, invest 10 per cent in equities.
The proposal will give confidence to pension fund managers to develop their own business model and decide on the investment they need to put in staffing and infrastructure.
Besides, subscribers will feel confident that the manager handling their fund will not get de-registered in three years.
Currently, eight pension fund managers manage private-sector funds, while three run by state-owned financial institutions are allowed to manage central and state government funds.
The SBI Pension Funds Pvt Ltd, UTI Retirement Solutions Ltd, and LIC Pension Fund Ltd manage the government corpus. They also manage the private-sector corpus along with ICICI Prudential Pension Fund Management Co Ltd, Kotak Mahindra Pension Fund Ltd, HDFC Pension Management Co Ltd, Reliance Capital Pension Fund Ltd and the pension fund incorporated by Birla Sun Life Insurance Co Ltd.
The latest round of bids could see more pension fund managers coming on board. PFRDA is considering a common uniform request for proposal for both the government and the private sector.
For the past five years, while the Employees’ Provident Fund Organisation has been giving a return of 8.25-9.5 per cent to its subscribers, NPS has given a return of 9.2 per cent and NPS Lite has given a compound annual growth return of 9.68 per cent.
However, NPS is taxed at the withdrawal stage, while Employees’ Provident Fund is not.
In a bid to bring NPS on par with EPF, the government had announced taxation for both the funds, but rolled back the one for EPF following backlash from employees.
The Seventh Pay Commission, headed by A K Mathur, recommended ‘exempt exempt exempt’ status for NPS as well, arguing NPS should be on a par with the EPF scheme in terms of tax-free withdrawal to provide a level-playing field.
EEE status means the subscriber would not be taxed at the time of contribution, accretion and withdrawal from the fund.
An illustration by Uttam Ghosh/Rediff.com