NPS guaranteed return product to have floating rates, reset every year

Guarantee benchmarked to the rate of return on ten-year government security

A minimum assured return scheme (MARS) in the new pension system (NPS) would have a floating rate which would reset every year under the proposed new product to be launched by the pension regulator early next financial year.

There would be a lock-in period of ten years for the product and the guarantee would be benchmarked to the rate of return on ten-year government security, Supratim Bandyopadhyay, chairman of the pension fund regulatory and development authority (PFRDA), told 'Business Standard'.

"The guarantee is not a fixed guarantee, it is a floating one every year," he said.

Suppose the guarantee is fixed for five per cent today, it will be valid for one year and thereafter it will be reset either upwards or downwards. If a shock happens in between and yield variance is high, PFRDA will intervene and reset it, he said.

Bandyopadhyay said the guarantee will be less than the ten-year government security. If the ten-year government paper gives 7.5 per cent interest rate, the guarantee could be five, keeping a difference of 2.5 per cent or so.

If the market performs better and the rate of return is over five per cent, it will be given to investors. If the market performs worse, the rate of return would not go less than five per cent and the fund manager will have to bear the difference.

For this purpose, PFRDA will come out with insolvency norms for fund managers in line with insurance companies since this is for the first time that MARS is coming out, he said.

Under current schemes, sponsors—individually or jointly—must have a net worth of at least Rs 50 crore on the last day of each of the preceding five financial years, before they make applications to the PFRDA. Of that amount, at least Rs 25 crore should be the capital.

Bandyopadhyay said the PFRDA board will discuss the proposal shortly. After the board’s approval, the proposal will be discussed with central record keeping agencies and fund managers. The product may be launched in the early part of the next financial year, he said.

A ten-year lock in period for subscribers means that a scheme will run for as many years. This means that 10 years shall be minimum, as well as maximum, tenor of investments under the scheme.

Only those investors who remain invested for 10 years will get a guaranteed return.

EY Actuarial Services, consultants to the PFRDA on MARS, gave six structures to the pension regulator. The regulator and pension fund managers chose one.

"This one is the simplest of all. We (PFRDA) and pension fund managers agreed that there should be a fixed guarantee for a fixed number of years. The fixed rate of guarantee will now be decided. The requirement of minimum net-worth/capital will depend on the rate of guarantee," a PFRDA official had said earlier.

MARS assumes importance since the Rajasthan, Chhattisgarh and Jharkhand governments have opted out of the NPS and embraced the old pension system (OPS); Punjab and Himachal Pradesh are considering the same.

The Centre made NPS mandatory for its new employees from January 1, 2004, and subsequently, all the states except West Bengal, had adopted the NPS for their employees.

The pensioner gets assured benefits under the OPS, usually 50 per cent of his last-drawn basic salary and dearness relief, which is adjusted every six months in line with inflation. There are no assured benefits but defined contributions in the NPS, at present. MARS tries to fill this gap in the NPS to an extent.

The PFRDA Act talks of putting in place MARS products, but they have not been launched yet. The Act talked about having these products by the end of 2013-14.