Minimum guaranteed-return pension products may have varied capital needs

Minimum assured-return schemes the pension regulator is planning to launch five-six months down the line may have varied capital requirements for sponsors of pension funds.

Those having higher assets under management (AUM) may have greater requirements of minimum paid-up capital, sources told Business Standard. The requirement may also change on the basis of the exposure of a scheme to debt and equity, they said. The Pension Fund Regulatory and Development Authority (PFRDA) has given the task of designing the minimum guaranteed-return pension sc­he­mes to E&Y Actuarial Services LLP.

At present, the 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, at least Rs 25 crore should be its capital. It does not vary with the change in AUM or exposure to equity and debt of pension fund managers. The minimum capital requirement is the same for all pension fund managers (PFMs) irrespective of AUM. “There is no differentiation if you are doing mainly equity or mainly debt,” a key source said. But this may not be the case with minimum guaranteed-return products.

“The minimum capital we will prescribe will be linked to AUM. Higher minimum capital will be prescribed for those having more AUM. You need capital for meeting the guarantee in case the net asset value falls below assured returns,” the source cited above said.

“In all other products, there is no guarantee and whatever you earn, you pass on to customers after deducting some charges,” he explained. “In case there is a guarantee, you have to pay more if you have greater exposure and hence the minimum capital required will be more,” another source said.

He said the minimum requirement would be “linked to your investment in equity or debt markets”. “If you are giving a 7 per cent guarantee and investing in only debt paper, the minimum capital required will be less than that for the sponsor whose portfolio manager is underwriting 7 per cent and investing 75 per cent in the equity market,” said the person quoted above.

It is still being contemplated whether there will be one rate for guaranteed products or more than one, sources said. In case there is more than one, those providing higher guarantees are likely to have higher minimum capital requirements, they added.

Depending on the rate, fund managers can decide to put part of the scheme in equity as well, depending on the choice of subscriber.

“Whenever you are giving guarantees, those have to be met. For instance if you are giving a guarantee of 7 per cent, you put the money in the G-Sec giving you 7 per cent. That is one way of doing it. Alternatively if you don’t give a guarantee of 7 per cent and rather give 5 per cent, then there is a difference between the two guarantees which allows you to take some risks. You took some risks and put some money in equity markets to see whether you get higher returns,” a source cited above said.

“If investment in equity works out, you get higher than even 7 per cent returns or else 5 per cent is anyway guaranteed. If you want a guaranteed return product, you can’t get what you do in the pure equity market. That expectation is wrong,” he said. “Lots of actuarial inputs are required. The consultant will design the product and it will help us in launching it,” PFRDA Chairman Sup­r­atim Bandyopadhyay had earlier said.