In what could be a missed opportunity, the finance ministry has decided that annuity plans will be regulated by IRDAI, while PFRDA will oversee pension products. This means that the current regulatory structure will continue and pension products across the financial sector will be overseen by various financial regulators.
In 2015, PFRDA had sought permission from the government to be the sole regulator for all pension products, including those sold by insurers.
PFRDA has agreed to the new arrangement on the condition that any unregulated pension product in the market will come under its purview.
For customers, having a single regulator would have been an easier solution. At present, pension products having retirement benefits as well as annuity components come under the ambit of multiple regulators. If there was a single regulator, all product approvals and regulations related to pension products would have been streamlined through one channel.
“We did not want to disturb the existing regulatory system by making sudden changes that would have caused some friction among regulators. Hence, a status quo has been advised as the final decision,” said an official.
Good news for companies
For companies operating in the pension space under PFRDA and IRDAI, this comes as a welcome development. If there was a single regulator, insurance companies that sell annuity plans to NPS subscribers would be regulated by PFRDA. Insurers are already regulated by IRDAI and need prior clearance from the regulator to sell any product in the market.
Currently, LIC Pension Fund, SBI Pension Funds and UTI Retirement Solutions are the pension fund managers for the public sector. For the private sector, apart from these three entities, there are four others: HDFC Pension Management, ICICI Prudential Pension Fund Management, Kotak Mahindra Pension Fund and Aditya Birla Sun Life Pension Management.
For pension fund managers, most of which are subsidiaries of insurance companies, the status quo works well. It allows them to follow only the PFRDA, which then internally consults other regulators for distribution aspects.
The pension sector
PFRDA regulates the National Pension System and Atal Pension Yojana. As of August 31, the total assets under management of both these products stood at Rs 4.87 lakh crore, recording 34 percent year-on-year growth.
The National Pension System (NPS) is the flagship product regulated by PFRDA. Under the NPS, individual savings are pooled into a pension fund, which is then invested by PFRDA-regulated professional fund managers in diversified portfolios comprising of government bonds, bills, corporate debentures and shares.
At the time of exiting the NPS (at retirement), subscribers can use the accumulated pension wealth under the scheme to purchase a life annuity from a life insurance company. These annuity plans are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
Insurance products, including annuity plans and retirement products titled ‘pension plans’, are regulated by IRDAI. Similarly, the Securities and Exchange Board of India (Sebi) regulates retirement-linked mutual fund plans.
Why a single regulator?
In 2015, PFRDA, under then chairman Hemant Contractor, wanted uniformity in pension products and hence had requested the government to allow the pension regulator to be put in charge of all such instruments available in the market.
PFRDA, which was established with the intent of selling pure-play pension products, had for long lobbied for the exclusive right to be the watchdog.
The idea was that having one regulator would also ease customer grievances. In the pension segment, there were complaints filed by customers who alleged that they were being sold insurance companies’ pension plans in place of NPS. Additionally, customers also alleged that banks and other distributors were reluctant to sell NPS products.
While an internal expert committee was set up by the finance ministry to look into the matter, no decision was taken. Later, the country moved into general election mode. With a new government being formed in May 2019, the matter was looked at afresh and a decision has now been taken.
In earlier discussions with the Finance Ministry, PFRDA had suggested that it be allowed to regulate all pension products in the Indian market. Further, the regulator wanted the word ‘pension’ to be attached to only those products that it had approved and that it regulated.