Fund managers will need to show more capital to honour the guarantee – if the actual returns fall below the assured amount, they will have to bridge the gap. This will push up fund management charges and fees, and bring down investment returns.
The National Pension System (NPS), which invests in equities, has a low-cost management fee and generates superior returns. The compound annual growth rate for NPS schemes is around 9.5% even now.
The 10-year government securities yield is about 7.2%. Guaranteed returns will push fund managers to invest mainly in low-risk government bonds, and lower the value of pension benefits.
The Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013, mandated giving investors seeking minimum assured returns the option to invest in such schemes. This was a bad idea.
The Minimum Assured Return Scheme has assumed importance now as states like Rajasthan, Chhattisgarh and Jharkhand have reverted from NPS to the old pension scheme to provide assured returns to employees. This short-sighted approach will push up their future pension burden needlessly.
These states must continue with NPS, buffering it with a top up in the corpus that goes into annuities, if needed. Already, GoI has enhanced its contribution to NPS to 14% from 10% for central government employees. Eighteen states have followed suit.
This will increase the pool of funds, and give fund managers the flexibility to diversify investment across asset classes and enhance returns for subscribers.