Monday, May 4, 2009

Playing safe, new pension plan halves equity cap to 50%

Contrary to its earlier draft, the New Pension Scheme (NPS) for all citizens to be launched on May 1 has capped the equity exposure fund managers can take on investments made by subscribers at 50 per cent. The draft investment guidelines issued by the Pension Fund Regulatory and Development Authority (PFRDA) earlier had recommended that equity exposure can go up to 100 per cent.
“The idea is to distinguish between mutual funds and pension funds, the latter being a long-term investment plan with an objective to provide individuals a safety net. Given the current market conditions, we were advised accordingly,” PFRDA chairman D Swarup told The Indian Express. However, he said that “we can review this cap after one year.”
After launching the NPS last year for those government employees who joined on or after January 1, 2004, the PFRDA has now opened the doors for the unorganised and private sector citizens.
Swarup said that the NPS “combines flexibility of choice of portfolio, fund managers and the quantum, frequency of investment.” A subscriber can decide the mix of his portfolio between three asset classes: G — Central and state government bonds, C — liquid schemes of mutual funds, fixed deposits of banks and corporate bonds and E — equities. The permissible equity exposure of 50 per cent will, however, be only through index funds, tracking either the 30-scrip BSE Sensex or the NSE’s Nifty 50.
The regulator has also put in place a default option that will work like a life-cycle fund. Up to 35 years of age of a subscriber, the fund will invest 50 per cent in equities, 20 per cent in Central and state government bonds and 30 per cent in the C category. Over the next 20 years, investment in equity will gradually be pared to 10 per cent. The fund will automatically redirect the money invested in equities to government bonds, the safest of all asset classes.
The NPS allows a minimum annual investment of Rs 6,000 and a minimum single deposit of Rs 500. The scheme will be distributed through 23 points of presence that include select banks, life insurers and asset management companies.
Pension fund managers will charge 0.009 basis points as fund management fee (Rs 900 for every Rs 1 lakh of assets managed). Life insurance and mutual fund companies charge between 1 per cent and 2.5 per cent of the fund value.
However, with other charges like a one-time registration fee of Rs 40, transaction fee of Rs 20 and Rs 350 as an annual CRA (central record keeping), the New Pension Scheme becomes a tad expensive for small-ticket investments. An investment of Rs 1,000 a month in a balanced mutual fund, for example, will entail total charges (entry loads and management fee) of about Rs 510 a year. The same investment in the NPS will attract Rs 640 as charges.
Investments made in Public Provident Fund (PPF), Employee Provident Fund (EPF) and Group Provident Fund (GPF) are tax exempt in all three stages of investment, accumulation and withdrawal. In the NPS, funds are taxed at the withdrawal stage. The regulator has been pushing for a level-playing field, but the government has not yet responded.
The pension money of the private and unorganised sector will be managed by six fund managers: ICICI Prudential Life Insurance, IDFC Asset Management Company, Kotak Mahindra AMC, Reliance Capital, SBI Pension Funds and UTI Retirement Solutions.

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