While the insurance sector continues to grapple with the regulator’s guidelines on pension plans, the Association of Mutual Funds in India (Amfi), the trade association, has already started working towards filling this void.
Amfi set up a committee to recommend on pension scheme products by mutual fund houses. Sources said, “To attract long-term money, MF houses need schemes with specific features like cost-effectiveness and higher returns than existing pension products.” The committee has made initial recommendations which, if implemented, will help fund houses compete with both the government’s New Pension Scheme (NPS) and pension plans from insurance companies. For instance, all MF schemes are proposed to have an option of pension plans with a lock-in till 58 years. “The lock-in period will encourage distributors to sell long-term products because it will ensure a steady flow of income for the next 20-30 years through trail commissions,” added the source.
The committee has recommended that the cost of entering the scheme should be lower/same as the NPS. For opening an NPS account, the central record keeping agency charges Rs 50, another Rs 280 for maintenance and Rs 6 a transaction. The proposal is for initial subscription cost to be Rs 40, lowered to Rs 20 for subsequent transactions. The asset servicing charge is 0.0075 per cent and fund management charge is 0.0009 per cent, annually.
Even the returns could be better. “The NPS restricts investments in exchange traded funds (ETFs). Even the most aggressive investor can only invest 50 per cent of the money in ETFs, thereby limiting their rate of return. If an investor chooses the pension option in an equity-diversified scheme, the rate of return could be much higher,” said the source.
An interesting facet of this scheme is likely to be portability. It has been proposed investors be allowed to shift from one scheme to another within the same fund house and even between different fund houses. If accepted by MF houses, this will give lot of options to retail investors.
For example, if someone has invested in an aggressive fund but wants to shift to a defensive scheme with more debt and less equity or a balanced fund in later years, he/she will be able to do so seamlessly.
The committee, after finalising the report, plans to approach the finance ministry for tax benefits.
“If these pension schemes get tax benefits for investment, as well as the final corpus, it will encourage more investors to enter these,” said a fund manager in the know.
Currently, there are three pension schemes by MFs. UTI Retirement Benefit Pension Scheme and Templeton India Pension Plan, which have returned 10.83 per cent (since 1994) and 12.83 per cent (since 1997) since their inception, respectively. Returns from NPS have been nine to 12 per cent annualised in the past three years.
Tata MF also has retirement savings schemes and gives options such as conservative, aggressive and moderate schemes — much like a life cycle one. Both UTI Retirement and Templeton India retirement schemes get tax benefits under Section 80C of the Income Tax Act.