Commenting on the recommendations, Chairman of the pension fund regulator- PFRDA, D Swarup said the entire opposition to the draft recommendation in the consultation paper was only on one side of it. He accused the IRDA of only looking at the business side of the aspect without taking into account the consumer benefit. “They are being very sensitive about only the business side of the equation. They are not looking at the consumer side of the equation. The entire committee’s terms of reference is with reference to seeing the consumer’s interest and whatever opposition you might have heard either from the regulator or from the industry only talks about the impact it will have on the industry because they are dependent on the agent who pushes a product because of the commission’s structure.”
“What we have said is there is a commission that ranges from something like 6% and goes to as high as 40% in a product per se. The average commission paid out in 2007-08 has been of the order of 16.25%. The NPS right from day one has been a no-load product. Sebi followed suit on August 1 and they have declared.”
Here is an excerpt of the exclusive interview with D Swarup on CNBC-TV18. Also watch the accompanying video.
Q: We haven’t really spoken over the last year or two while we talked about the NPS but we haven’t really spoken about the larger picture, are pension reforms on track you feel, are they making a serious positive impact for the reason we first went in for these reforms?
A: We moved from 2005 and we began, the pension story began in 2005 when the PFRDA got constituted but there after you know that the progress has been slow mainly because of the PFRDA bill having not been passed by the Parliament and thanks to the government and they finally we agreed to what we had requested them and we don’t really require a bill to be passed by the parliament, to introduce a pension product in the country. We do require the bill to give statutory powers to the regulator but in the interim it could manage some pension reforms through a contractual arrangement with all the stakeholders in the business, so we have come a long way since then now. From 2005, we have introduced a new pension system, the government transferred the funds early April 2008 which are being managed by three fund managers. Then from the May 1 this year, we have opened up a scheme too all the citizens of the country. So we have moved far but other than that you are talking about the pension firms as well as a whole for the other participants, we also move in that direction also.
Q: The detractors of the whole pension reforms, thankfully are not there in the government any more but they would always say that there is a risk that this is pension money and you are going to investing a larger part of it as compared to the pervious regime where it was hardly ever invested in equities, its been over a year and a half when atleast the government corpus and employee corpus has been managed and this one year perhaps has seen a tsunami in the markets, can you give us a sense if you were to tell people that these are kind of returns that these managers have delivered in a market which was perhaps the worst in recent times, do you have some numbers that you can share with us?
A: I can but prior to the period when pension reforms were introduced, it was available to only 12-13% of our workforce so the story is only of those 12-13% people who are in a defined benefit regime like government employees and those are in the organized sector and covered by the provident fund organization. So the question of risk remains only in the remaining 87% people whose investment returns would be market related but as you mentioned. We have had experience of something like a full lone year now 2008-09 and the average returns have been 14.8%, but the fund managers have been a little conservative in the beginning so they didn’t invest more than 5% of the AUM in equity markets so 90% of the money was invested in debt and the returns have been 14.82% but we have seen a secular trend in the equities market also we have done an exercise to see us as to what have been the returns in the equity markets in the last 30-35 years and if you remain invested, the average return in the equity market ranges from 14-15% per annum and on a compounding basis and that’s not a bad story.
Q: So what you are saying is even despite being conservative?
A: Yes.
Q: It’s been 14%?
A: Yes
Q: In a market which has gone through perhaps an upheaval, and unparallel?
A: That risk will be there in any market related regime but you can always diversify risk before our investment options are flexible depending on your own personal risk appetite you can select and put more money in corporate bonds in government securities market, so their risk can be diversified but if you are not wanting to take that burden for deciding for yourself, we have worked out what we call an auto choice and depending on your age we have worked out how much you must invest in equities and in corporate bonds and how much in government securities market,
Q: Are you hopeful that this government will be able to now push through with the PFRDA bill?
A: I am very hopeful now because I understand the bill is now almost ready to go to the cabinet for the clearance and thereafter to be introduced in the next session of the parliament and hopefully before the end of this calendar year we should see that the PFRDA bill being converted into an act.
Q: The other big change which you mentioned about which happened is that earlier this year you threw open pension to every individual in the country through the NPS route hasn’t really taken off in the way perhaps even you would have thought it would have taken off? What is the problem?
A: Not really because we knew we won’t have a spectacular success story in the beginning because our product really suffers from three negatives and they are firstly awareness about saving for pensions, its not that much in the country as it should be, the second issue is about our selling model which is a direct selling model as distinct from the mutual funds and the insurance industry which are actually sold by the financial advisors and agents etc but our product has direct selling and distribution model, the individual has to go to a bank and has to go to somewhere to buy that product and the third reason why the success is not there as much as it should have been because of the tax disadvantage we suffered from.
Q: Why did that happen, here is a government which is committed at the highest level on pushing pension reforms and you make a change of a kind which says that I can invest in any other instruments and not need to pay tax after a certain point of time when I get my returns but in this its going to be taxable, have you been able to talk to the government, what is the feedback you have got from it?
A: We have been in discussion with the government for more than two years now on this area and ideally a retirement and a pension product should receive the most preferential tax treatment like the way it happens all over the world but somehow we began with the tax disadvantage but our discussions have borne fruit now and as you are aware the new tax code brings every long term savings product including retirement or the same tax stream which is the double ET regime as against the EEE which they enjoy today and we have EET, so now the government is taken a view that instead of taking us to a EEE tax regime that on stages is free on tax, they are bringing the other product into a EET regime.
Q: So they have removed the dis-incentive and they haven’t provided the incentive?
A: The first step is to have a level playing field, so I am quite happy that even though it’s still a little way away, something like 18 months from now the new tax code will come into being and hopefully the government will see that yes a level playing field is important in the financial product.
Q: Do you feel let down by the entities who you asked to sell these products, the NPS for instance and that really is the cornerstone for the success in NPS because as you said you went for a different model. But are you happy with the way they have gone about?
A: Let me talk about why we selected the Derick’s Selling Model and direct distribution model because of two main reasons, the first was that had we had an intermediary and an agent between the subscriber and the bank etc, then the cost would have gone up for the NPAs and ultimately the incidence of any cost falls on the investor like in insurance and like in mutual funds, so we didn’t want the cost to be high, the second reason was that we have seen and from the experience we have learnt that similar products get mis-sold by the agencies etc so they are the two main reasons, so we are willing to be patient and we are willing to wait rather than change our distribution model but having said that yes the impression that we had the points of sale that we selected and it would have done some preparation prior to being licensed in selling the product because they had been in discussion with us for quite some time and they were aware that this product is coming and I thought they will be ready to sell it but I found that they have started really doing the groundwork only after they got the license in May. So it obviously takes a little, training the individuals, printing the brochures and things of that nature and let me also say that the same points of sale are selling some competitive products also like insurance and mutual funds, as long as these products carry, some commissions built in into the price of product but obviously our products will not push across the counter by the bank etc. So we know these are the handicaps which we are suffering from, the corrective measures are in the pipeline.
Q: Are you de-licensing some of them?
A: No; I think that is too early for really to do that, we have had a detailed meeting with all and we have worked out a strategy for that and we have requested them to give us a business plan, to fix targets and so we will monitor their performance against that business plan and thereafter but its too early days to really de-license them..
Q: Let me come to the other very major decision that you’ve taken recently. A very critical component of our financial sector, which is the entire investment advisory community, which was till now not regulated or rather regulated by multiple entities, there was a committee that you chaired, which is the sort of first draft of your findings have been put out for public comment by you. You’ve called for certain fairly drastic changes and while you have started your product from the very beginning with a basic premise that you are not going to be making it a commission driven product. We have seen Sebi having said recently on August 1 that entry load is banned. The insurance industry seems a little concerned about what you announced. Where do you stand on this? Is this the basic fundamental principle that you as an investor should decide, and I think the misconception seems to be that commissions have been banned and that is not what you have done? All you have said is they should not be embedded into a financial product and that should be decided between an investor and the agent or the distributor or whatever you may call it?
A: We had, as you said, put up a consultation paper on our website something like three or four weeks ago. We had an interaction, which I call a public hearing for the first time and probably the first hearing on this subject something about 10 days ago in Delhi where we had invited all the stakeholders of the business including the insurance industry and the mutual fund industry, the pension industry and financial advisors and agents, experts etc., and all industry federations as well.
The three main recommendations in the consultation paper are: Firstly, the financial advisors need to be regulated more than what they had done or what happens today, and that too by ‘a’ agency and not by multiple agencies.
Secondly, there must be common minimum standards for these financial advisors in terms of the entry level, entry barriers, in terms of the examinations that they have to pass, in terms of continuing education etc. Then we came to the conclusion that there needs to be common disclosure norms for the benefit of the consumers of financial products. Finally, we thought that the time has now come that in all financial products, there should be no commission embedded in the price, which technically what we call a no-load structure, in the financial product.
There has been no opposition to any other conclusion except the last one that I mentioned that all products should go no-load and there should be no commission embedded in the product per se. As you rightly said, we have nowhere said that agents or financial advisors should not be paid for the services. In fact the committee has recognised the key role, which the agents and the financial advisors play in terms of personal finance, in terms of savings or in terms of investments in the country. So, we know that they will continue to play a very important role in this area. But we are only saying for the benefit of the consumer: Firstly, it needs to be disclosed to him as to what are the costs and commissions and fees and other charges and risks involved. So, all that has to be put in very understandable language to the consumer.
The second is, if you embed a commission in the price, then obviously the financial advisor will push that product in which he gets the highest commission. We think that is detrimental to the interests of the consumer of the financial product. We have said let it be converted into a fee, which the consumer must pay the agent directly. I am not saying that it should be paid through two different cheques. It can be paid in the same cheque as well. That is only a micro detail that we can work on. So, that is the only reason we have said the commission will be converted into a fee.
Q: Why then is the insurance industry up in arms? What you are saying is the fact that it is a consumer driven initiative that is meant to benefit the consumer? Why has the insurance industry, the regulator, come out so openly, and questioned the very logic of the recommendations of this committee?
A: Obviously it affects the industry’s role. In fact, as I mentioned earlier, the entire opposition to the draft recommendation in the consultation paper is only on one side of it, and that is, they are being very sensitive about only the business side of the equation, of what we are mentioning. They are not seeing the consumer side of the equation now. The entire committee's terms of reference is with reference to seeing the consumer's interest and whatever opposition you might have heard either from the regulator or from the industry, only talks about the impact it will have on the industry because they are dependent on the agent who sort of pushes a product because of the commission structure.
What we have said is there is a commission that ranges from something like 6% and goes up to as high as 40% in a product per se. The average commission paid out in 2007-08 has been of the order of 16.25%. The NPS right from day one has been a no-load product. Sebi followed suit on August 1 and they have declared.
Q: All global regulators are going the same way?
A: Yes, most of the global regulators also are going the same way. It is not that we have been influenced only by what is happening across the world. We think the time has come in India as well that the consumer must be aware firstly of what he is paying and secondly it should not be embedded in the price because whatever the level of financial literacy is there in our country, a product that has a high commission structure will continue to be pushed in case it is embedded in the price of the product per se.
Q: An IRDA representative was a part of your committee. That was a multi-regulatory committee. Have they dissented?
A: In fact we had two members from IRDA as against one member each from RBI, Sebi and PFRDA. But the fact really is they have not really dissented as such but they have expressed the view that this is going to hugely impact the industry. But as I mentioned, they are seeing only the business side of the equation, they are not seeing the consumer. We have trying to persuade and convince them that the time has now come to see the consumer side of the equation.
Q: If I remember right, in the previous committee, which went nowhere after 18 months, you had dissented and said that there needs to be more thought given to this report?
A: That is right.
Q: Today you are faced with a situation where one regulator is atleast openly, publicly saying that this is not the right way ahead. Are you going to change your mind? Are you very clear about your decision?
A: As I said, this is only at the draft stage at this point in time. We have sort of discussing within the committee and in fact we had a meeting yesterday. Some more facts and figures have to be collected. Finally, we are going to take a view in the second week of October and that is the end of the commission.
Q: But are you saying that you may look at the timeframe, you may look at the timetable and numbers. But in principle you are very clear that this whole concept of embedded commissions into a financial product must go?
A: I think conceptually and all the inputs that we are getting in the committee’s consultation paper point to the direction that conceptually we are in the right direction. I see no reason why conceptually anything should change from what is said that all – there should be a level playing field including in the commission structure across financial products. Conceptually I don’t think the majority in the committee is likely to change their point of view.
Courtesy-Published on Thu, Sep 24, 2009 at 21:37
Updated at Sat, Sep 26, 2009 at 14:38
Source : CNBC-TV18
