September 28, 2021

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Minimum assured return: E&Y, Mercer bid to design scheme under NPS

NPSNPSThe guarantee on returns could be in the range of 4 to 6% per annum, similar to G-Sec yields.

After the lapse of eight years since the enactment of the Pension Fund Regulatory and Development Authority (PFRDA) Act 2013, the regulator may finally roll out a minimum assured return scheme (MARS) in compliance with the Act under the national pension system (NPS).

However, official sources caution that such a scheme that might guarantee nearly half of returns subscribers get in the market linked NPS schemes might cost the exchequer a lot.

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After failing to get sufficient interest from actuarial firms in the first attempt, the PFRDA has received two bids last week — from Ernst & Young (E&Y) and Mercer — to design a MARS. The PFRDA will likely select one of these two by this month-end and launch the MARS product by end of this financial year to comply with the statutory requirement, according to official sources.

Currently, the schemes under NPS do not guarantee any kind of returns or benefits as they are market-determined. Of course, the Atal Pension Yojana guarantees a minimum monthly pension of Rs 1,000-5,000 to the subscribers based on their contributions.

The average returns on NPS corpus have been over 10% in the past 12 years for the central government and state government employees, who form the bulk of the subscribers’ AUM corpus (83% of Rs 6.3 lakh crore as of August 31, 2021).

Under MARS, the returns will be guaranteed for a three-five years horizon after factoring in market risks and this can be reset after the period. The guarantee on returns could be in the range of 4 to 6% per annum, similar to G-Sec yields. To make such a product attractive, the PFRDA will encourage fund managers to generate higher returns (over and above the guaranteed rate) with an incentive of say, 0.25% of the extra returns to the fund managers and balance to subscribers, sources said.

In the past, the Comptroller and Auditor General of India (CAG) had criticized PFRDA for not rolling out a MARS, in compliance with the provisions of the PFRDA Act. As per the Act, the subscriber shall have an option to invest his funds in such schemes providing MARS as may be notified by the Authority.

“It was only after a lapse of five years since notification of the PFRDA Act, that PFRDA had initiated a process to design/ formulate a scheme offering MARS and even after lapse of more than 15 years since the introduction of the NPS, the subscribers were yet to receive such minimum assurance,” CAG had said in its performance audit report for FY18 released on September 23, 2020.

However, PFRDA found it challenging to launch such a product as product providers were ready to provide only a capital guarantee. So, guarantee on returns means such a product will come with a cost as subscribers have to cough up a separate guarantee fee to fund managers, who need to shore up their capital adequacy ratio.

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