FDI in pension fund management can wait

FDI in pension fund management can wait

Staying the course in NPS with the Centre and staffers of over 16 states may pay off in the medium term than scouting for a foreign partner now and parting with equity. Value can be encashed for those who are patient and willing to play the waiting game, says Shaji Vikraman

THE government and the pension fund regulator PFRDA, last week, put in place an enabling mechanism to help local players get on board a foreign partner for pension fund management.
An executive order was issued, keeping in view that foreign investment limits unless mandated specifically by parliamentary legislation can be notified. Besides, a parliamentary committee that vetted the bill which is yet to be approved had already settled for a 26% foreign investment limit.
The notification hasn’t quite excited local players. For good reasons. Three state-owned or state-controlled firms are due to be selected as pension fund managers to handle contributions to the New Pension Scheme (NPS). If all goes well and three of them (SBI, UTI and LIC are front runners) start operating a couple of months from now, the investible corpus they would get to put away either in stocks, corporate debt or government securities isn’t going to exceed Rs 2,000 crore.
Well, that’s a small change for these firms which have individual schemes where the corpus is far in excess of this figure. Not just that. The pension regulator like its counterpart elsewhere is bent on driving down expenses and fees to the bare minimum. That is the key to ensuring a good return over the long run for NPS subscribers.
But for the three fund managers, this would mean being squeezed on fees in the first phase. Once volumes grow especially after workers in the organised and unorganised sectors expectedly join in after the Pensions Bill is approved, fund managers can look forward to a better deal.
Until that happens, it makes little sense for any of these early birds selected as pension fund managers to bring in a foreign investor. Against this backdrop at this early stage of opening up, it is not conceivable that any of these firms would offer a stake to a foreign partner. If they do, it would mean an overseas gaining entry into the pension segment with the entry premium being low.
For some banks which got into the insurance business, it has been a chastening experience with partners as those who entered a little later have managed to wrest good premiums from their overseas partners.
The experience in the insurance sector shows that as business scales up, local entities on the sheer strength of their early bird status, experience and network can command good premiums. All state-controlled firms which are finally selected by the regulator would have to incorporate new firms for their foray into pension fund management. A net worth norm of Rs 10 crore is hardly a barrier for state-owned firms.
So staying the course in NPS with the Centre and staffers of over 16 states may pay off in the medium term than scouting for a foreign partner now and parting with equity now. Value can be encashed for those who are patient and willing to play the waiting game. Until then, splitting hairs on the extent of foreign equity in this business, or the route to be adopted for entry by overseas investors, won’t help.