The proposal is being discussed because an assured payout requires fund managers to hedge market risk, and pension funds have only conditional, limited access to derivatives for that purpose.
“We’ve been pushing for the scheme, but it comes at a huge cost. Our key differentiator has always been low cost, so we have to maintain that discipline,” said a source familiar with the development.
The PFRDA has been working on a “Minimum Assured Return Scheme” (MARS) for the National Pension System (NPS), but the scheme has not been launched. The regulator has also been examining assured-payout options for subscribers.
“We currently don’t use derivatives, but we are exploring that opportunity with regulators,” a source said.
“The use of forward rate agreements (FRAs) is evolving in the industry, and pension funds may eventually get access to derivatives, but they need to build systems to use them,” the person added.
Separately, the PFRDA has made several changes to NPS rules over the previous and this financial year so far.
In December last year, the regulator eased exit and withdrawal norms for non-government subscribers under the Common Schemes and Multiple Scheme Framework. The lump sum withdrawal limit at exit was raised to 80 per cent of the corpus for subscribers with savings above ₹12 lakh, from 60 per cent earlier, with the mandatory annuitisation portion reduced correspondingly. The same month, the PFRDA allowed pension funds to invest NPS assets in commodities.
In January, the PFRDA approved a framework allowing scheduled commercial banks to independently sponsor pension funds managing NPS assets. It appointed three new trustees to the NPS Trust Board, set up a panel to examine assured-payout options for subscribers, and eased exit norms for NPS Vatsalya, under which parents can open NPS accounts for minor children.
In June, the PFRDA tightened audit norms for Points of Presence (PoPs), the intermediaries through which subscribers open and operate NPS accounts. Annual audits were made mandatory for PoPs with 10,000 or more subscribers, with less frequent audits for smaller ones, covering operational controls around contributions, withdrawals and service requests.
Further, in July a revised charge structure under the Central Recordkeeping Agency (CRA) took effect. It changed annual maintenance charges across Tier-I and Tier-II accounts, introduced a lower charge for dormant accounts with no contribution for four consecutive quarters, and waived charges on Tier-II accounts with balances up to ₹1,000.
At the end of August, the PFRDA issued circulars revising the scheme classification framework under the NPS. Pension funds were required to rename existing Multiple Scheme Framework schemes and consolidate schemes spanning more than one equity category into a single prescribed category within 30 days. The regulator also specified the sequence in which subscriber-facing platforms should display the scheme type, category and pension fund, and set the Life Cycle 50-Moderate scheme as the default for subscribers who do not make an active choice.
Reducing the burden
- According to sources, pension funds may get to use derivatives such as FRAs to hedge against market risk, but their access is conditional
- PFRDA aims to keep NPS low cost, as hedging and other mechanisms are likely to make the product expensive
- Assured-payout options for subscribers is under consideration by the regulator
