I'm happy with 26% FDI in pension, happier with 49%: Agarwal

Says more than FDI limit what matters to investors is an economically viable model

After a long wait, the Union Cabinet recently cleared the PFRDA Bill proposing statutory powers for the Pension Fund Regulatory Development Authority (PFRDA) and making provisions for a higher foreign direct investment of 49% if it’s allowed in the insurance sector. In an interview with Vrishti Beniwal, PFRDA Chairman Yogesh Agarwal says in terms of foreign funds flowing into the country one should not expect much because the capital requirement is lower than what it is in insurance. Excerpts:

What kind of powers would you get once the PFRDA Bill is enacted?
The statutory powers basically means once Parliament passes the Bill you don’t have to go to the court of law for imposing any penalties. For a regulator going to the 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 will come at a later stage of NPS. Right now the basic issue is reaching out to people and the Bill doesn’t talk about marketing and distribution issues.

If 49% FDI in insurance is approved by Parliament, the ceiling for pension will also go up to 49%. Insurance sector needs about $5-6 billion in the immediate future, but does the pension sector really needs higher FDI?
Not right now. Insurance sector is a capital guzzler, but pension is not. In our revised guidelines we have stipulated a capital requirement of only Rs 25 crore per pension fund manager. So with 49%, the foreign investor has to put only about Rs 12.5 crore.

Even with 26% FDI allowed in pension through executive order, foreign investors have not shown any interest. How do you expect people to invest 49% in the sector?
Foreign players want to be present in the sector. People get swayed by the fact that the pension industry is just starting off, but as far as the future goes it has huge potential. In the US, pension funds have a higher corpus than insurance or mutual fund. In India, so far even the domestic investors were not interested because of an extremely low asset management fee. We had closed the doors by allowing only six players. Now that we have opened up the sector more players will be interested.

Did you get enquires from foreign investors after the PFRDA Bill was cleared by the Cabinet?
I have been getting the enquiries since July 12 when we came up with liberalised guidelines for pension fund managers. It’s mostly from the US and Europe because that’s where the pension industry has been very strong. It is not important whether they have 26% or 49% FDI; what is more important is that they should have an economically viable business model. We have ensured that by freeing the industry.

The PFRDA Bill also talks about products giving 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, which I don’t think are many in this country. They will have the option to put 100% in government securities and get assured returns. But if it’s lower risk then returns also have to be low.

Financial Sector Legislative Reforms Commission has proposed a unified regulator for all financial sector laws, including pension, in its recent approach paper. Is it feasible in your view?
The model has been copied from what they call “twin peaks” model in Australia. Requirements of a country like Australia are very much different from India in terms of complexities of the country, diversity of customers and geography. This model separates the function of the regulator between prudential regulation and customer grievance redressel. That doesn’t work for a country like India because customer grievance cannot be addressed separately from the person regulating the industry.

The Commission says this model will address the issue of regulatory overlap that can be there in case of a product like pension.
There is no regulatory overlap. Pension products in insurance and mutual fund industry were there even when the NPS was not introduced. Now that NPS has come, 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 8-9% per year. The charge is 2-3% is for mutual funds, while the all inclusive cost for NPS is 0.43%.