A committee headed by HDFC chairman Deepak Parekh has suggested three plain vanilla asset classes based on their riskiness for investment by fund managers of the new pension system to be launched for all private citizens on April 1. These are: E – equities,C – bonds issued by state governments,municipal bodies,and infrastructure fund bonds,and,G – Central government securities,liquid schemes of mutual funds and fixed deposits of specified banks.
Pension Fund Regulatory and Development Authority chairman D Swarup said the committee had suggested that investors be given the freedom to decide the mix of these investments. It can be 100 per cent debt or equity. Fund managers will,however,be allowed to invest only in Nifty 50 stocks for now. PFRDA may later allow fund managers to actively manage the funds.
After launching the New Pension System for government service employees last year,PFRDA had invited recommendations on investment norms for the private sector. An expert committee of five members,chaired by Deepak Parekh,was formed which submitted its recommendations to the regulator today. The board of the regulator will meet tomorrow to clear the committees recommendations.
Besides,the proposed pension system will also offer a default option to investors which will work like a life-cycle fund. Up to 35 years of age,the fund will allow 65 per cent investment in equities. This will taper off to 10 per cent over the next 25 years. The fund allows a minimum investment of Rs 6,000 per annum,which translates to Rs 16.50 per day.
The charges are very competitive compared with other pension products on offer. Life insurance and MF companies charge anywhere between 1 per cent and 2.5 per cent of the fund value as management charge. The system,however,scores low on tax treatment compared with Public Provident Fund (PPF),Employee Provident Fund (EPF) and Group Provident Fund (GPF),where money is tax exempt in all three stages investment,accumulation and withdrawal. In the pension system,funds are taxed at the withdrawal stage.
The regulator has zeroed in on six fund managers,namely,IDFC Mutual Fund,Kotak Mahindra,SBI,UTI Asset Management,ICICI Prudential Life Insurance and Reliance MF,to manage the corpus. The fund will charge Rs 40 as initial registration,management fee of 0.09 basis points per Rs 1,000 and Rs 20 for every transaction. The investors will have to hold on to their investments for at least a year before they can make any switches,whether it is in the choice of fund managers or funds chosen.
For now,the entire corpus collected will be equally divided among the six fund managers and later,there will be one default fund manager as well.
Im not looking at amassing assets under management and,therefore,we will not allow direct selling of this scheme. Direct selling has often led to mis-selling. We will educate the investors and make this product reach to the masses through our generic marketing, said Swarup.
The product will be available through touch points,which includes banks,life insurance companies and AMCs.