145;Index funds are cheaper alternatives, but for that we146;ve to wait146;

The allocation of pension fund among three fund managers is for one year and will be reviewed every year.

With the Central Recordkeeping Agency CRA in place and three pension fund managers identified UTI, SBI and LIC, the stage is almost ready for managing the retirement monies of Central government employees by June 2008. In an interview to Deepti Bhaskaran, Pension Fund Regulatory and Development Authority PFRDA chairman D Swarup explains the rationale behind important issues of costs.

8226; Till the last month, the general impression was that the pension funds of government employees would be invested in index and exchange traded funds, which are cheaper options than managed funds and also offer 8216;equity exposure8217;. Now fund managers have also been given the option to invest in managed funds. Why?

It was recently communicated to me that we need to follow the guidelines stipulated by the Ministry of Finance for non-government pension funds. The guidelines clearly say that the pension fund can be invested through debt or equity mutual funds. Having said that, it is true that our plan was to invest via index funds, which are cheaper alternatives. But this will have to wait for the Pension Bill, which is pending in Parliament to be cleared and New Pension Scheme NPS is open for the public.

8226; PFRDA had stated that the fund management cost would be reined in at 5 basis points that8217;s 0.05 per cent, with LIC and UTI charging 5 bps and SBI charging 3 bps. But mutual funds that they will invest in have separate set of charges. As a result, the pension funds will not be as cheap as projected. Is it so?

I agree that 5 bps is the net of charges and that mutual funds will have separate charges but if you look at the volumes of the fund that will be invested, there is always room for fund managers to negotiate for a lower charge. If you look at the charges that mutual funds levy, it is largely due to recordkeeping function. We have a CRA already in place. So that cost can be deducted straightaway .

8226; Even then the cost is high. Apart from the 5 bps there is brokerage charge, which is capped at 10 bps, and then there are charges on account of CRA.

But it is still much lower than mutual funds. Also, CRA costs are fixed. So, initially, the cost might appear on the higher side but as the corpus grows the costs will come down. In mutual funds or other investment funds, where the charges are a percentage of total assets under management, the costs remain high but as pension funds grow, the CRA costs will come down. To talk about brokerage charge we have capped it to 10 per cent whereas mutual funds have no caps.

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8226; If fund managers can invest in mutual funds, why do we require separate pension fund managers? Plus, why would an asset management company AMC invest in successful schemes of other AMCs?

To answer your first question, we need separate fund managers to keep checks and balances and it is easier for the regulator to administer named entities. On your second question, the allocation of pension fund among three fund managers 8212; 55 per cent with SBI, 40 per cent with UTI and 5 per cent with LIC 8212; is for one year. This will be reviewed every year taking into account the fund manager8217;s performance and costs. Further, the contract that I have with these pension funds is for three years after which again there will be bidding.