India is poised to launch an innovative pension system on an unprecedented scale. After many years of languishing in bureaucratic limbo, the so-called New Pension System (NPS) is now set to go live on April 1, having just completed an eight-week flurry of activity to establish operational procedures and select fund managers.
The NPS is aimed at catering to the nearly 400 million people in India’s ‘unorganised’ sector of small and medium-sized enterprises and cottage industries.
It originated as a scheme for central government employees, with the intention of expanding to the private unorganised sector. Last year, the Pension Fund Regulatory and Development Authority (PFRDA), the system’s regulator, handed out three mandates for this role, to three government-owned fund managers, LIC Mutual Fund, State Bank of India Asset Management and UTI, based on recommendations forwarded by Crisil.
These mandates are mainly fixed income; they allow the managers to invest up to 15% in equities but so far none has come close to that cap.
Because the NPS is only mandatory for newly joining civil servants, the size outsourced to these three managers is modest, and they will be paid 3-5 bps on managed assets.
September saw another opening up in the pensions world, when the Employee Provident Funds Office, which manages around $25 billion on behalf of the organised sector (the larger corporations), for the first time outsourced assets to four fund houses — HSBC Asset Management, ICICI Prudential Asset Management, Reliance Capital and SBI. Collectively these houses will receive $2-3 billion annually to run domestic bond portfolios.
But the biggest, most anticipated move has been the extension of the NPS from just covering new civil servants to the entirety of the unorganised sector. This had been held up for years on opposition from the Marxist parties.
With a general election scheduled, the PFRDA’s chairman D Swarup realised he had a short window of opportunity to get the NPS expansion through Parliament and into action. The PFRDA appointed Mercer to assist it with designing the plan for the unorganised sector in December and unveiled the results this month.
The designers appear to have come up with a truly innovative design that is intended to maximise benefits to members, rather than enrich product providers.
The ‘new’ NPS is structured around three tiers. First is the central recordkeeping agency (CRA), which manages the system and is responsible for collecting contributions and disbursing benefits. Beneath this is a myriad of points of presence (PoPs), in other words, distributors. Although entities such as the post office were considered, the designers for now have opted to stick with commercial banks and life insurance companies. An additional level of independent financial advisors has likewise been scrapped over concerns about their ability to understand or sell the NPS. So for now, the PoPs — mainly state-owned banks — will serve as the front line.
The CRA is now in the process of finalising its choice of external fund managers who will handle all assets for members from the unorganised sector. It has made offers to six providers for three-year contracts, and it is assumed these six will accept, although negotiations are not over. The six include three government-owned entities (ICICI Life Insurance, SBI and UTI) and three private players (IDFC Asset Management, Kotak Asset Management and Reliance Capital). By law, managers to the system cannot have more than 26% foreign ownership, which has automatically excluded foreign players such as Franklin Templeton and HSBC Asset Management, and most joint ventures as well.
These will manage two portfolios of indexed equities, two of fixed income, and two of corporate bonds and other credit instruments — all domestic, for now. These will serve as building blocks to which members can allocate any mix of assets.
One of the most progressive features of the NPS is its default option for anyone who doesn’t want to pick among funds, which is a lifecycle option. The CRA will allocate on a member’s behalf among the six funds, with an equities component ranging from 80%-10%, adjusting accounts each year by the member’s age.
