Informist, Wednesday, May 24, 2023
--PFRDA head: National Pension Scheme AUM to top 11 trln rupees FY24
--National pension plan AUM 9.44 trln rupee on May 13, up 30%
--Minimum assured pension plan still in works
--"Done considerable" work on minimum assured pension plan
--Saw fall in new subscribers Jan-Mar on new tax regime
--Likely to add one new pension fund manager in FY24
By Priyansh Verma, Priyasmita Dutta and Sagar Sen
NEW DELHI – The total corpus under the National Pension System is likely to cross 11 trln rupees in the current financial year ending March, the Pension Fund Regulatory and Development Authority Chairperson Deepak Mohanty said.
"We will get to 11 trln rupees, there is no problem in that," Mohanty told Informist in an interview.
As on May 13, the total corpus under the National Pension System, regulated by the PFRDA, was 9.44 trln rupees, up 30% from a year ago. At the end of the last fiscal year on Mar 31, the corpus was 8.98 trln rupees, up 22% year-on-year. The National Pension System had 63.8 mln subscribers as on May 13, up 21% from a year ago.
Asked about the proposal for a minimum assured pension plan, Mohanty said, it was in the works. "We have done considerable work on that side. But the challenge again is to balance return and the risk associated with that, because from an investor’s point of view, the return should look attractive," he said, adding that he cannot give a timeline for the rollout.
According to the regulator's data, the average return generated by pension funds in equity schemes was 26.9% in three years, while in government securities schemes, the return was 5.6%.
Mohanty said, unlike earlier years, pension funds saw a drop in subscriber addition in the last quarter of the financial year as there are no tax sops for investment in pension funds under the new income tax regime.
"But going forward, I don't think that will be an issue because those who want to take those benefits can always choose the old income tax scheme.
On Feb 1, the Budget for 2023-24 announced lower tax rates under the new income tax regime, which is now the default scheme, from this year. Under the new regime, while the tax rates will be lower, taxpayers will not get deductions and exemptions that were given under the old scheme. However, they have the option to choose the old scheme.
Following are the edited excerpts of the interview:
Q. What is the progress on the proposal for a minimum assured plan? Any timeline for the rollout?
A. The minimum assured plan continues to be in the works. We have done considerable work on that side. But the challenge again is to balance the returns and the risk associated with that, because from an investor's point of view, the return should look attractive. And once you bring in guarantee, the cost also goes up. As you know that pension funds are very thinly capitalised, but if you bring in additional guarantee, in terms of fixed interest instruments, we will have to provide additional capital.
I can't give you a timeline of when it will come out.
Q. What is the rate of return that you are looking at for the minimum assured plan?
A. Now, it is too early because we have not determined that. Various things are there, so let's see. It will be more dynamic, could be with a particular type of benchmark. This is the minimum, the part that is assured. Then, you can get something more, that will be upside. But the downside will be absorbed by the pension house.
Q. Is there any possibility that the minimum assured plan will be rolled out in 2023-24?
A. Since it is under active consideration, once a satisfactory product comes out, then you can really come out with that. I can't prejudge, it has to pass through the board also.
Q. In reference to the minimum assured plan, is there a need to tweak the capital adequacy norms?
A. The principal scheme is the defined contribution plan that we have, and so we don't want something else coming in and contaminating that. There is a separate insolvency capital to be provided for the other activity. So there is no need for revising the capital for the other side.
Q. There are currently 10 fund managers. Are you looking to add more? Also, what's the update on on-tap licencing?
A. There may be one fund manager added this year. As you know, pension licencing is on-tap, so we are yet to come out for the current financial year. This is from the previous year. There is scope for new pension fund managers, the corpus is growing and the kind of fees that we have put, that makes commercial sense. And given the NPS coverage, and the potential which is there for the private sector, both corporate and individuals, the sector is slated to grow.
Q. What is your outlook on fund managers investing in green bonds? Do you see investments in green bonds in 2023-24, and what quantum?
A. I think they have done upwards of 3 bln rupees in green bonds, and more opportunities are coming in. Going forward, this will increase because issuances will be more on this side.
Q. Do you plan to tweak investment patterns based on stakeholders' feedback?
A. We review performance as per the benchmarks that we have set for each category that we have. Also, in terms of peers, that is a good forum to see how others are also doing. That is how it works. The investment guidelines are subject to review periodically. So, the current guidelines which are there, that seems fine at this moment, but we are always open to change. Inequity investment, we have expanded, that they can invest in top 200 companies, and in bonds there is no restriction as long as you are sticking with the ratings. My point is, it is periodically reviewed, and if need be, we will revise it.
Q. Is there any consultation regarding tweaking your exposure in debt, equity investments?
A. There are different schemes which are flexible. Someone wants to go for equity can go for full equity. In tier-1, full equity means that you can put 75% in equity. Earlier, with your age, obviously, the equity exposure automatically was brought down, because there are life cycle funds. In the equity market, you need to have staying power. It is not just that somebody has less number of years, it is very risky to get into equity.
The way the financial cycle works is you stay for at least a couple of cycles. And for five-to-six years, if you are staying there, then you make money on that side. Earlier, with the age of the person, the equity component used to come down. But now what happens is that if you have made an active choice, it remains 75% throughout. Consciously, you are willing to take that risk and make that choice. I think that is a big positive from that end.
Q. Last year, the equity market and the bond market did well. What is the kind of returns that you got?
A. The experience is pretty good. The annual returns are extremely good. Since inception, equity has given over 12% return CAGR. In 2022-23, it has given over 18% return, that is one year. Three-year would be about 27%.
Q. PFRDA closed 2021-22 with a 7.4-trln-rupee corpus. In 2022-23, it was close to 9 trln rupees. Taking the same growth forward, you are likely to close this fiscal somewhere around 10.5 trln rupees...
A. It will be more than 11 trln rupees. Our aim is that the number should grow. We have to really grow the non-government sector on the NPS side. The bulk of it will come from the corporates itself.
Q. Is it safe to say you will grow to 11 trln rupees by the financial year end?
A. We will get to 11 trln rupees, there is no problem in that. The moot point here is the corpus will expand. At a particular point of time, depending on how the market is, it may come down, but over the medium-term, the corpus is going to grow. Currently, you may see certain things happening, this happens on mark-to-market basis. That doesn't mean there is erosion in value. So, pension being long-term assets, there is expansion.
Q. Is PFRDA looking to form an industry body on the lines of mutual funds and insurers?
A. That is required. We have approved setting up an association. NPS Trust is now piloting the whole process. In my interaction with the pension funds, I told them to do that. That has a lot of benefits.
Q. Will a board approval be needed for this?
A. No, all that is done. There is no problem on that side. See, it is how quickly they come together to form an association. So we have approved and told them.
Q. The Budget announced a panel headed by the finance secretary to review the National Pension System. Has the panel met? Is there any recommendation that the panel is currently deliberating upon?
A. It is too premature to comment on the committee. I would only say that if you see the terms of reference, one of the issues that the committee would examine is if NPS could be tweaked for the employees and could be more beneficial. NPS is a defined contribution scheme and the old pension system is a defined benefit scheme, so they are very different. NPS is a fully funded scheme, while the old-pension scheme is not. So, the committee may look at a combination of different things.
Q. Did the new tax regime lead to a drop in NPS subscribers?
A. We did see. If you see the non-government sector NPS, meaning the corporate plus individuals, that had 9.75 lakh (975,000) subscribers in 2021-22 and in 2022-23 it became 10 lakhs (1 mln). That could have been a little higher because normally, we see there is a bit of seasonality during the last quarter. Out of those, some invest irrespective of tax considerations while some apparently come because of the tax considerations. So, given the issue around the taxation side, we saw a dip in that quarter.
But going forward, I don't think that will be an issue because those who want to take those benefits can always choose the old income tax scheme. The new income tax regime is neutral to all instruments. In the old scheme, pension fund becomes an important choice for individuals as an investment. But pension is not a substitute for other financial products due to its own merit. So, that dip was temporary. End
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