A viable business model is more important: Yogesh Agarwal
Interview with Chairman, PFRDA
After a long wait, the Cabinet recently cleared the Pension Fund Regulatory and Development Authority (PFRDA) Bill, which proposes statutory powers for PFRDA. Chairman Yogesh Agarwal, in an interview with Vrishti Beniwal, says, in terms of foreign funds flowing into the country, one should not expect much because the capital requirement is lower than that in the insurance sector. Edited excerpts:
What powers would you get once the PFRDA Bill is enacted?
The statutory powers basically mean once Parliament passes the Bill, we don’t have to go to court to impose a penalty. For a regulator, going to court is not a viable option. To ensure compliance, you have to have statutory powers.
How would it help strengthen the New Pension Scheme (NPS)?
The issue of penalties being imposed would come at a later stage of the NPS. Right now, the basic issue is reaching out to people. The Bill doesn’t talk about marketing and distribution issues.
If Parliament approves 49 per cent foreign direct investment (FDI) in insurance, the FDI ceiling for the pension sector would also rise to that level. The insurance sector needs about $5-6 billion in the immediate future, but does the pension sector need more FDI?
Not right now. The insurance sector is a capital guzzler, but the pension sector is not. In our revised guidelines, we have stipulated capital requirement of only Rs 25 crore per pension fund manager. So, with 49 per cent, the foreign investor has to put in only about Rs 12.5 crore.
Though an executive order allowed 26 per cent FDI into the pension sector, foreign investors haven’t shown any interest. How do you expect people to invest 49 per cent in the sector?
Foreign players want to be present in the sector. People are swayed by the fact that the pension industry is just starting. But as far as the future goes, it has huge potential. In the US, pension funds have corpuses higher than those for insurance or mutual funds. In India, so far, even domestic investors were not interested because of an extremely low asset management fee. We had closed the door by allowing only six players. Now that we have opened the sector, more players would be interested.
Have you received enquires from foreign investors after the Cabinet cleared the PFRDA Bill?
I have been receiving enquiries since July 12, when we came up with liberalised guidelines for pension fund managers. Most of these are from the US and Europe because that’s where the pension industry has been very strong. Whether they have 26 per cent or 49 per cent FDI is not important; what is important is they should have an economically viable business model. We have ensured that by freeing the industry.
The PFRDA Bill also proposes minimum assured returns to investors. Have you started developing such products?
I’ll offer at least one scheme for people who are totally risk-averse, though I don’t think there are many such people in the country. They would have the option to put in the entire amount in government securities and get assured returns. But if the risks are low, returns also have to be low.
In its recent approach paper, the Financial Sector Legislative Reforms Commission has proposed a unified regulator for all financial sector laws, including pension. Is this feasible?
The model has been copied from what they call the ‘twin peaks’ model in Australia. The requirements of a country like Australia are very different from India’s, in terms of complexities of the country and the diversity in customers and geography.
This model separates the function of the regulator between prudential regulation and customer grievance redressel. This doesn’t work for a country like India because customer grievance cannot be separated from the process of regulating the industry.
The commission says this model would address the issue of regulatory overlap in case of products like those in the pension space.
There is no regulatory overlap. Pension products in the insurance and mutual fund industry were there even when the NPS wasn’t introduced. Now, with the NPS, which is far superior to any other pension product in the market in terms of architecture, portability, transparency, lower costs and better returns, you will gradually see drying up of pension products from insurance companies and mutual funds. For a pension product from an insurance company, you end up paying a charge of eight to nine per cent a year. The charge is two to three per cent for mutual funds, while the all-inclusive cost for NPS is 0.43 per cent.