We should've competing pension products: PFRDA Chairperson S Ramann

PFRDA chief hints at 100% FDI parity, new small pension funds, and unified regulation to expand India's pension reach and improve financial literacy

The insurance and pension laws are “joined at the hip”, and the Centre’s move to allow 100 per cent foreign direct investment in the insurance sector could also pave the way for global pension fund managers to enter the market without joint venture partners, Pension Fund Regulatory and Development Authority (PFRDA) Chairperson S Ramann said in a fireside chat with Vikas Dhoot. The regulator is also considering an idea to permit smaller pension fund houses, on the lines of small finance banks regulated by the Reserve Bank of India. Edited excerpts: 

How do we scale up India’s pension coverage? 

The National Pension System (NPS) has delivered an average annual return of 9.2 per cent over 15 years, but participation remains skewed. About 75 per cent of total NPS assets are from government subscribers and 25 per cent from others. We perhaps need to reverse that. The goal should be to raise non-government NPS members from 10 million to 250–300 million in the next five to six years using various digital platforms. We need more funds as well, particularly to reach out to Tier-II and Tier-III cities. 

 

We have large co-operatives, areas where there is greater wealth, micro, small, and medium enterprise clusters, and lots of workers. We never know where that demand comes from, and we need not just stick to the existing structure of a pension fund that requires ₹50 crore of capital. Can we not look at having a small pension fund, if I could take a leaf out of small finance banks? 

We need to leverage the fact that we’ve got the best payment system in the world. So why are we not able to bring in more people as distributors who are probably not regulated entities as we demand today? We just need to ensure we are testing for the data flow and ensuring there are no leaks anywhere.

 

Even before the Association of Mutual Funds in India launched the popular ‘Mutual Funds Sahi Hai’ campaign, PFRDA had launched the ‘NPS Zaroori Hai’ campaign. Is there something in the works to spread the pension message further? 

This issue cuts across financial products. Financial literacy is the bedrock for a lot of buying of financial products, and we still need to get that literacy going in vast numbers in a lot of regions. We are so urban-focused today that we’ve forgotten what it is to be able to do a small business in a reasonably small town. I can assure you there is such a high aspiration among those people to grow their wealth and get their children better educated. We need to have financial planners cutting across the sort of turf between mutual funds (MFs), insurance, and pensions, and have the large number of persons who are already there as a distribution workforce ensure we have a minimum certification programme for each product and make that into a viable business. We really have to look at literacy going down to the grassroots. The regulators should be putting their effort behind this entire literacy campaign to reach the right audience with the right content.

 

The multiplicity of pension products under different regulatory domains is an issue. The insurance industry offers ‘retirement’ products, including annuities. A few MF schemes are called retirement benefit plans. There is, of course, the Employees’ Provident Fund Organisation (EPFO). Is there a need for some cohesion in the way these products are regulated, maybe through a dialogue with other regulators? 

That dialogue is actually happening. There is a regulatory forum for pensions, which has already been instituted. But I think the larger issue is that we have had financial products emerge over the past 150 years, and each one has come in for a particular purpose and has served that purpose very well. I would say that given the need for all these products, we need to have a simple definition which everybody adheres to. So, in order to reduce the possibility of mis-selling, what does a pension product mean? According to us, it is at least 15 years of being invested in a particular product and saving towards that.

 

We have something called a reasonable corpus that builds up with the power of compounding, but at the end of that, today, the law says that you have to forcibly put it into an annuity. Now, an annuity is a very good product, but given the fact that it has to deal with the uncertainty of life, anyone who has designed that product will ensure that there is enough capital buffer and a solvency ratio to ensure that you are in a position to meet the longevity risk as and when it happens. So we have to provide alternatives in terms of the pension payout product. That is why PFRDA has issued a consultation paper looking at the possibility of whether we can add something further with annuity. I think the job really is for the regulator to put across a set of products, and finally, it is for each customer to choose what is suitable for them.

 

The late finance minister Arun Jaitley had alluded to an idea in one of his Budget speeches that an Indian employee should have a choice between the EPFO and the NPS. Could this new forum examine this? 

The EPF is a provident fund which has an accumulation stage. A pension has both an accumulation and a payout stage. The EPF is there for good reason, because there was nothing else in this country. The pension sliver started in 1995. Unfortunately, it was targeted to everybody and not just those below the threshold of income for EPF coverage. So, going forward, as part of the regulators’ forum, we are talking about how these pension products could come under a single regulatory umbrella.

 

EPF and Public Provident Fund are in a particular genre and we should let them remain. It is for the customers, given their tax profile, to assess which products they should put their money in. The return on the EPF corpus may be a tad below what the NPS has got, but it’s also a very good rate of return. So we should have competing products. And that level of competition really is what we should be looking forward to.