The pension regulator is mulling setting up annuity service providers outside the insurance sector, wants PFMs to provide annuities for its pension products rather than relying on insurance companies. Is this planting the seeds for another regulatory turf war?

In a move that will start another regulatory turf war, the Pension Fund Regulatory and Development Authority (PFRDA) wants annuity products to be sold by pension fund managers. Currently, they are exclusively sold by insurance companies. This is one of the many radical thoughts of PFRDA under the new chairman Yogesh Agarwal which will be debated by a committee set up under the chairmanship of the former chairman of the Securities and Exchange Board of India, GN Bajpai, to overhaul the stagnant New Pension System (NPS). If the PFRDA has its way, there would be a new turf war - this time between the insurance regulator and PFRDA over whether annuity is a pension product and should be regulated by the latter too. Of course, before PFRDA does step in to regulate annuities, it will have to get the required teeth. The PFRDA Act has still not been passed by Parliament.

Articulating PFRDA's view on annuity, in an interview with the newspaper Mint, Mr Agarwal said that that the regulator was in favour of having annuity products as distinct from what insurance companies are providing. "We consider ourselves as the regulator of the entire pension sector and in today's market, you see most products are hybrid products that can come under multiple regulators. ASPs (Annuity Service Providers) will work with the insurance regulator to see how best we can regulate them. But we would have ASPs outside the insurance sector also."

Essentially, PFRDA is trying not only to put the onus of selling its products on fund managers but also wants them to create and distribute annuity products for the benefit of pension customers. This means that the seven PFMs, namely, 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 would be peddling annuity products. Of these, only UTI and IDFC have no life insurance arm of their own; the rest have independent life insurance operations.

Mr Agarwal even suggested that insurance companies get out of annuity altogether. On being asked whether this would lead to a duplication of service, Mr Agarwal replied, "See, providing annuity is a feature of a pension product. So, at some stage, insurance companies will have to rethink. They have been doing it for 40-50 years and so you can't just tell them to stop. But, at the same time, when the investor takes a decision in due course, he will have a choice between insurance firms and PFMs on the basis of who gives better returns."

However, PFRDA seems to have missed a point or two in coming up with this idea. While the chairman claims that providing annuity is the feature of a pension product, he seems to have ignored the provisions of the Insurance Act, 1938, Section 2(11), which outlines annuity as the business of a life insurance company. Gorakhnath Agarwal, chief actuary, Future Generali India Life Insurance Co Ltd explained to Moneylife, "As per the definition given under (the) Insurance Act, annuity products are categorised under life insurance business and come under the purview of IRDA. If PFRDA wants to set up separate annuity providers, the government may have to make appropriate changes to the Act." This means that the PFRDA may inadvertently set off another regulatory turf war in the country in case it pushes the idea and IRDA has something else to say abut it. As of now, it is only a thought and so may not have sounded alarm bells at the insurance regulator's offices. Even internationally, annuity products remain the domain of life insurance companies and other entities are not allowed to sell annuity products.

Mr Agarwal's idea behind the exercise seems to be offering a wider choice for pension customers, who can pick and choose their own annuity providers on the basis of who gives better returns. PFRDA's rationale is that a pension product is much more than the annuity product offered by insurance companies and that providing an annuity is the feature of a pension product. So, it wants the PFMs for its pension products to offer annuities to the customer. However, this move will likely create more confusion in the minds of the customers, who are already clueless about the modalities of the NPS, apart from another round of turf wars, underlying therefore the need to have a super regulator.

PFRDA has been thinking of ways to change the way pension systems operate in the country. First came the call for having pension fund managers (PFMs) push the struggling New Pension System (NPS) instead of the point of presence service providers (PoP-SPs). As we pointed out, however, (see here: http://www.moneylife.in/article/76/8986.html) this makes no sense especially since fund companies are not able to sell even a tried and tested product like equity mutual funds.