The Pension Fund Regulatory and Development Authority (PFRDA) decision to allow pension fund managers of the New
Pension Scheme (NPS) to do active fund management—they can now invest in a larger universe of 150 or so stocks listed on NSE and BSE—instead of just investing in/replicating an index fund based on the Nifty or the Sensex appears a good idea since it gives subscribers the option of higher returns. There is, of course, the need to be careful for a variety of reasons. One, as long as fund managers were just imitating an index fund, there was no need to watch over their conduct—presumably this means PFRDA will have to be more watchful. Two, while Sebi has enough checks and balances to ensure mutual fund managers don’t do anything wrong, mutual funds offer many exit options whereas pension funds by their very nature don’t. There is also the issue of whether a largely financially illiterate population feels more comfortable with a pension manager who invests half their contributions—the ceiling on equity investments is 50%—in an index-based fund vis a vis active management of a portfolio. But presumably this is something the market will take care of—fund managers not doing active investments will tend to have lower charges and if subscribers feel more comfortable with passive investments based on index funds, that is what the market will offer. Allowing active investments, at the end of the day, is just another choice being made available.
Indeed, while NPS has a default option where the proportion of funds invested in equity reduces as a subscriber gets older, it may be a good idea to see if a large proportion can be allowed where subscribers specifically want it. Investing in debt may be a safe option, but if debt is giving a return of 8% versus an inflation level of 9%, the only thing that is sure is that effective savings are being eroded with each passing year.
NPS, however, has many other serious problems that need tackling. There is, for instance, no secure payment collection system today—a Near Field Communication-based mobile payments gateway of the type used by banking correspondents would ensure there was no siphoning off of funds by collection agents. Two, though the government put in place a R1,000 co-contribution for each new subscriber in NPS provided the subscriber is not covered under any government pension scheme, the system is not working since, in many cases, poorer subscribers can put in R700 but not R1,000—surely some flexibility needs to be built in. By far the largest problem, however, remains the monopoly given to NSDL, which is the NPS’s central record-keeping agency (CRA). CRA charges add up to, in many cases, even as much as 10% of contributions. This is easily solved by granting more CRA licenses but, for some reason, this has not been done. In many ways, the benefits of the lower fees charged by fund managers are taken away by the higher CRA charges.