With a fresh round of licensing on the cards, pension fund manager fees are likely to be hiked. These fees are currently capped at 0.01%. A circular on 13 August by the Pension Fund Regulatory and Development Authority (PFRDA) has cleared the stage for a new round of licensing, with permanent licenses rather than the five-year ones issued currently. Industry experts suggest that the new fees could be upwards of 0.1%.
“The regulator may set a cap for the next round of request for proposals (RFPs). However, I expect pension fund manager (PFM) fees to be increased upwards to anywhere between 0.1% and 0.25%. Anything lower than 10 basis points will make the sector unviable given the infrastructure and regulatory costs,” said Narayanan Sadanandan, managing director and chief executive officer of SBI Pension Funds. A basis point is one-hundredth of a per cent.
“Last time there was an RFP process, the cap was to be raised to 0.1%. I think, this time around, 0.15-0.2% will be the likely figure. Our brokerage cost alone is five basis points,” said a senior executive at another pension fund.
The previous round of RFPs in 2016 envisaged a hike in PFM fees to 0.1% from the current 0.01%, however, it was not implemented due to ambiguity about foreign direct investment (FDI) rules in pension funds.
Amit Gopal, India business leader-investments at Mercer explained why a fee hike is important for the industry. “Pension fund managers are expected to have higher capital requirements, which calls for higher fees. A moderate hike would actually be in the interest of investors and make the industry more sustainable. Also, remember that pension fund managers do not simply create passive funds, they actively pick stocks,” he said.
Apart from PFM fees, NPS funds have charges such as custodian charges, CRA charges and point-of-presence (PoP) charges, which are paid out to intermediaries (capped at 0.25% of contributions). However, even after including them and factoring in a hike, pension funds will compare favourably with competing financial products such as mutual funds and insurance companies.
Mutual fund expense ratios are capped at 2.25%, which is currently 225 times of the PFM fees. The expenses in insurance policies are even higher. Unit-linked insurance plans (Ulips) for instance have a fund management charge capped at 1.35% and a variety of other charges such as premium allocation charge, mortality charge and discontinuance charge. You can find out more about these here.