Pension for a paisa

In theory, low costs are desirable in the money management business, because a penny saved is a penny that can be distributed to investors. But Reliance Capital’s recent offer of a one basis point — 1 paisa per ₹100 — fee to manage monies under the National Pension System (NPS) stretches this theory too far. After all, money management is a skill-intensive profession and if the fund manager’s fee is a pittance, where is the incentive for him to deploy the best talent, resources or effort into managing the money entrusted to him? Short-term savings on NPS fees shouldn’t come at the cost of inflation-beating returns, which is the ultimate purpose of retirement funds.

The fee quoted by Reliance Capital is extremely low by industry standards. Indeed, the same private firms who have bid for the NPS are charging fees of 150-200 basis points for managing domestic mutual funds and over 200 basis points for insurance assets. Even in developed markets, where the emergence of passive index funds has pared down costs, fund manager fees average no less than 100 basis points. Vanguard, the world’s largest mutual fund company which has built its asset management business mainly on the promise of low cost, charges 20 basis points. Given that the NPS auction rules require all its eight new managers to match the lowest bid to win the mandate, it is a moot point how viable the country’s nascent private pension business would be if locked into a one basis point cost structure, based on the results of the latest auction. Nor does the NPS with an investment kitty of ₹2,600 crore offer the scale to make up for low fees. The pension regulator should also note that the NPS has so far gained hardly any traction with retail investors, despite being much more economical and flexible than other retirement avenues and even delivering strong double-digit returns. This is more due to the lack of marketing effort to create awareness about the scheme and establish a dedicated distribution network to promote it to retail investors. The firms now managing NPS monies complain that the existing 25 basis point fee offers no real incentive to undertake promotional activity. Then, how does whittling down this fee even further help?

Given that the Centre is looking to the NPS to act as the ultimate social security net for India’s growing workforce over the long term, selecting managers based mainly on their ability to quote the lowest fees needs re-examination. The annual fund management fee could be capped at say, 25 basis points to keep costs reasonably low. Giving a higher weightage to qualitative criteria – such as the sponsor’s track record in money management, reputation, business plan and ability to stay the course – is a more prudent way to choose the custodians of a flagship retirement savings scheme.

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