Pension fund body sees assets growing this fiscal too

Pension fund regulator PFRDA expects the assets under management (AUM) in the pension industry to grow by at least 33 per cent this fiscal, as awareness about pension as a form of savings gains further currency in the country.

“If these benign conditions in the market continue, we should be touching ₹2.5 lakh crore AUM by end-March 2018 from the level of ₹1.87 lakh crore in end-March 2017. We are working towards this,” Hemant Contractor, Chairman, Pension Fund Regulatory and Development Authority (PFRDA), told BusinessLine .

This is significant as pension AUMs had recorded a whopping 45 per cent growth in 2016-17.

Contractor expects the 7th Pay Commission award implementation to fuel growth in the pension industry’s AUM this fiscal. “Every Pay Commission, there is a hike in the contribution rate. The private sector has nothing comparable to this. The private sector is mostly tax-driven. The growth rate of the government sector will be very high because of these factors,” he said.

Year-after-year the government contributions continue to dwarf that of the non-government segment, said Contractor. However, in terms of the number of subscribers, government subscribers account for less than a third now of the total subscriber universe of 1.61 crore.

While the non-government sector grows faster than the government sector in terms of the number of subscribers, it is the reverse situation for value of contribution, he noted.

Contractor said that PFRDA was yet to hear from the Finance Ministry regarding its proposal to allow higher equity contribution for government subscribers. As on date, government subscribers’ investment in equities is capped at 15 per cent of their contribution. PFRDA wants this limit on equities to be hiked to 50 per cent so that a higher proportion of their contributions could be parked in equities.

“Unfortunately this has not made much progress as we would have liked. We have had several rounds of discussions with the Government on this,” Contractor said.

However, Contractor expects some developments in the next one month with the Personnel Ministry — which has set up a committee — looking into the recommendations of the 7th Pay Commission as regards changes in the pension structure.

Besides suggesting that government contribution to National Pension System (NPS) be increased to 12 per cent from 10 per cent, the 7th Pay Commission had also advocated higher allocation to equities in the portfolio for government employees.

“All these things are being looked into by the Personnel Ministry. Once the report comes out, then one can see some light at the end of the tunnel,” said Contractor.

Contractor also highlighted that the PFRDA had suggested that employees be given the option for life-cycle funds. The quantum of equity allocation could be linked to their age and as their age increases, the allocation to equities can come down.

If it is felt that increasing the equity allocation from 15 per cent to 50 per cent would be adventurous for government subscribers, then they could be provided with this life-cycle fund option, he noted. Contractor also did not rule out the possibility of the government taking a call on this without waiting for the Personnel Ministry-appointed committee’s report on the 7th Pay Commission recommendations.

As on date, the pension funds are invested under a well diversified portfolio. “We are not overly exposed to equity risk. Equity, which is most volatile, accounts for just 12-13 per cent of investments. Movements in the equity markets do not affect our portfolio very much,” he said.

However, the flip side is that when equity returns go up as it had in the last one year, any allocation of higher amounts to equities could have resulted in higher earnings on the pension monies, Contractor added. “Empirical evidence also shows that over longer periods of time equity is the best. That’s why we are pitching for a higher share of equities. We need to push for higher share as pension monies basically are long-term oriented funds,” he said.

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