Pension regulator risks repeating SEBI’s blunder in sidelining distributors
Moneylife Digital Team 09 September 2010

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. 

Anil D Kale
1 decade ago
The govt and PFRDA are indirectly pushing the people who are in need of retirement planning to the so called planners of Insurance industry(as they are the only agents left to sell a financial product, they are the only ones who make money)It seems that Govt of India wants to protect interests of Insurance companies and mainly LIC who provide funds to Govt projects at cheap rates and also bailout Govt by subscribing to PSU IPOs which anyway public is not subscribing to as in case of NMDC.

The common man has to find his way out of all this confusion on his own.

There is no point in expecting Govt to do everything which includes retirement planning as the basic needs of majority of population are not met.
1 decade ago
Í am surprised to see this kind of article in moneylife. Recently you had given statistics that there is no retail pariticipation in equity market and how skewness in our market depth. In this scenario, what learning are you refering to that Fund House have to learn ?
Retail participation in not there in the equity market and same is reflecting in drop of AUM of Fund house. Let's not link the same to entry-load ban imposed by the SEBI.
Keshav B Bhat
1 decade ago
Dear All,

I feel if anyone is really concerned about the retired people or senior citizens (every one is going to be one in their life some day or other unless they die early), they should workout to bring some good annuity product which will give good retuns to these people to support themselves when they have no other source of income.
every one is talking and advocating pension products but they do not realise all these products are of build up face products and in this face any normal financial proct is OK as the annuity products can be purchased by any accumulated funds. The need is to bring annuties with better retuns and to be made tax free to help the older ones.
Keshav B Bhat
1 decade ago
It seems like a common fascination for Regulators and the Govt.Dept of Disinvestment to pride themselves on how they succeed in beating down the fee of fund managers and other facilitators without realising what they gain is miniscule compared to what they lose by way of sales volume and price[in case of disinvestment]. The basic objective of the schemes get defeated with such narrow mentality of being penny-wise, pound foolish.What they lose is not easily quantifiable and hence these'wise' men get away with after causing early mortality/ attenuation of the very schemes entrusted to their care.
1 decade ago
The only way left for making NPS success is that Mr Pranavda(FM)who is behind this NPS idea and who tried to curtail MF industry by trying to eliminate IFAs should sell it personally -he should make ad films and should ask people to prefer NPS over MF-this is only way left to make success NPS without inclusion of IFAs.
1 decade ago
I think, industry is realizing the fact that w/o Advisors MF can't sell , because it is not possible for All AMC's to reach every single investor in Tier II & tier III cities. Investor who is investing his money in LIC, MF, PPF,NSC,KVP MIS,Post etc by a person from so many years, is the trusted person, and now my request to Regulator is to asked AMC's to trained Distributors as Advisors by conducting trainings, for turn them from Agent to Advisor/Financial Planner and donot avoid them, otherwise Industry will collapse.
1 decade ago
Just proves that bureaucrats do not understand marketing.== The very reason why PSUs find it tough to compete in the market and need MONOPOLY clutches.
1 decade ago
Why are the crooked brokers needed at all?
Keshav B Bhat
Replied to Sapna comment 1 decade ago
I am sorry to make the following coments, If you are saying all brokers are crooks just because some of them are crooks, what should you call all wemen are ..... just because some are ..............
Keshav B bhat
Replied to Sapna comment 1 decade ago
Every service or goods are sold through some mediator in every economic activity-TV ad,news paper ad or personal relation all are just differenr forms of broking-even our "KIRANA shopkeeper" who sells all commodities is a broker-why dont u go to farms and purchase SABZI from farmer or your mobile from factory of Nokia or Samsung-it just shows you dont know what broking means?is it not true that your Sabzi wala sells rotten sabzi to u sometimes claiming it to be fresh?same is investment advisory-all brokers are not good and all brokers are not crooked-Mind it well-
Keshav B Bhat
Replied to Sapna comment 1 decade ago
Why do u need anybody for anything?, you can do everything yourselves and get all the benifits for yourselves. Ihope this answers your question
Replied to Sapna comment 1 decade ago
yes no brokers needed. you should buy shares, mutual funds and cumpolsorily bank only though ration shop, the most efficient mode of distribution the world is eagerly awaiting to copy our model
Replied to Sapna comment 1 decade ago
Are all brokers crooked? It is like saying all manufacturers produce low quality products.
Replied to Sapna comment 1 decade ago
brokers dont sell NPS
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