The PFRDA is trying to get pension fund managers to push NPS. This makes no sense especially since fund companies are not able to sell even a tried and tested product like equity mutual funds

If the chairman of the pension regulatory body has his way, we may soon witness a repeat of the havoc created by the capital market regulator Securities and Exchange Board of India (SEBI) on the mutual fund industry. Itching to make substantial changes to the struggling New Pension System (NPS), the Pension Fund Regulatory and Development Authority (PFRDA) is mulling redrawing the rules of the game. Yogesh Agarwal, chairperson of PFRDA and formerly IDBI Bank chairman, has said that pension fund managers are the real stakeholders who should push the NPS and not the point of presence service providers (POP-SPs) like banks. Currently, there are 35 POPs and seven fund managers.

In a recent interview published in Mint, Mr Agarwal said, "After I took charge, I called a meeting of pension fund managers (PFMs) to discuss the matter. I feel the stakeholders are fund managers since they manage the investment. I asked them if they can work out a way to push NPS the way it is done with insurance and mutual funds."

On being asked why POPs should not be incentivised to sell NPS, Mr Agarwal said, "POPs are banks and they are not supposed to market. Also, why will they market NPS when they have other lucrative products to push?" In any financial product, be it ULIPs, mutual funds or life insurance, the intermediary is the crucial channel who reaches out to the public. The mutual fund industry has learnt this lesson the hard way. The ramifications of SEBI's ban on entry load last year is clearly visible today, where distributors have been virtually sidelined, leaving the industry in tatters. Since last August, Rs11,500 crore has flown out of mutual funds even as foreign and domestic institutional investors have invested tens of thousands of crores.

In such a scenario, it is unthinkable that the PFRDA is trying to put the onus of selling on fund managers rather than incentivising POPs, who provide the interface between the customers and the product. Essentially, the PFRDA is trying to implement the same broken business model for the pension industry. Worse, PFRDA seems completely unaware of the huge fundamental difference between a pension product and other financial products like mutual funds and insurance. A pension fund company can neither offer any product differentiation nor 'innovate' and bombard investors with a flurry of fanciful products, with matching advertisements as insurance companies and mutual funds can do. It is difficult to comprehend how one can expect the pension fund managers to deliver the results, when they themselves are reeling under the fallout of the various steps taken by the regulators.

Industry experts strongly feel that the PFRDA is taking a wrong turn, saying that by shifting the responsibility of sales on to the fund managers, the PFRDA will dilute the role of these entities and can create a possible conflict of interest.

"The POP is not getting any brokerage. If there is no brokerage then why should even POPs promote this product; they have 30 products to sell today. It should be promoted by the government itself by advertising massively," said a sales head of a private fund house. 

"Pension fund managers should stick to their job of fund management only. If you mix up roles then concentration goes haywire and your priorities take a U-turn. There should be specialised people to do specialised jobs. Pension fund managers are not keen to sell these products because they are getting very low management fee. I don't see how they (pension fund managers) will take this additional burden of pushing NPS. Pension fund managers are very keen on equity, which is a very small portion in NPS. Incentive should be based on performance rather than selling the product. A neutral person should be appointed to sell the products, otherwise all fund managers will claim that they are the best and try to push their products," said a Mumbai based certified financial planner (CFP).

The NPS regulator PFRDA has appointed 35 POPs across India to act as an intermediary between the customers and the Central Record Keeping Agency (CRA), which is the National Securities Depository Ltd (NSDL). The fund management charge of NPS is 0.009%, lowest as compared to any other financial product, anywhere in the world. However, the product has failed to take off in the absence of any incentive.

The NPS Trust, which supervises the funds managed by various pension fund managers (PFMs), evaluates the performance of the fund managers on a quarterly basis. On 1 July 2009, the NPS Trust and PFRDA had entered in to a memorandum of understanding (MoU) which contained the obligations of the NPS Trust. The clause mentioned, "The pension fund managers have been managing the fund schemes independently of other activities and have taken adequate steps to ensure that the interests of the beneficiaries are not compromised."If the above clause if anything to go by, the PFRDA is seemingly jumping one step ahead.

"PFRDA's original structure envisaged creating a 'Chinese Wall' between the fund manager and the source or customer. The Employees' Provident Fund Organisation (EPFO) had called for quotations to manage the money. Some players had quoted a miniscule fee to manage the EPFO corpus and others who quoted higher were totally out of business. There was an initial desire to acquire the market and that too the government pension. There were two logical flaws.

Firstly, the PFRDA repeated the same rate (fund management fee) year after year and secondly it compulsorily applied it to private sector pension players too. It is not viable for private fund managers. PFRDA will not advise investors to choose the right fund manager. That's why you need advisors. POP is merely an operational facilitation," said a senior official from a top fund house, preferring anonymity.

The PFRDA has appointed seven entities including private players like LIC Pension Fund Ltd, SBI Pension Funds Pvt Ltd, UTI Retirement Solutions Ltd, IDFC Pension Fund Management Co Ltd, ICICI Prudential Pension Funds Management Co Ltd, Kotak Mahindra Pension Fund Ltd and Reliance Capital Pension Fund Ltd to the manage the corpus of all Indian citizens. The central government' NPS corpus is managed by three public sector entities like SBI Pension Funds Pvt Ltd, LIC Pension Fund Ltd and UTI Retirement Solutions Ltd.