Loss-wary pension fund managers bet on fee hike

Fund managers queued up to grab a pie of the new pension scheme that opens for subscription on May 1. But even before the scheme is launched, they are complaining of it being a loss-making business with the investment management fee fixed at 0.009 per cent.

While none of the six appointed fund managers have approached the Pension Fund Regulatory and Development Authority (PFRDA) for reviewing the fee structure, they are hoping that the regulator does it on its own.

The six fund managers ICICI Prudential Pension Funds Management, IDFC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds and UTI Retirement Solutions  were selected on the basis of a technical evaluation, which was followed by a bidding process.

With UTI emerging as the lowest bidder, the others were asked to match the bid if they wanted to be a fund manager and the remaining five players grabbed the opportunity.

That was in February. Now, four of the six fund managers said the business would  be a dead loss for them. The head of one of the appointed fund managers said that the salary alone would add up to Rs 1.5-2 crore (Rs 15-20 million).

Another Rs 2.5 crore (Rs 25 million) will be needed for administrative costs and the board and committee meetings. Given the fee, we would earn Rs 90,000 if the assets under management were Rs 1,000 crore (Rs 10 billion).

So, each of us will need at least Rs 2,00,000 crore (Rs 2 trillion) in funds under management to cover the cost, the executive said.

According to preliminary estimates, the pension business could reach Rs 50,000 crore (Rs 500 billion) in five years and rise to Rs 2,00,000 crore by 2015,

an ICICI Prudential executive said.

The head of another pension fund management company said  the low fee would not even cover the transaction costs and brokerage for selling and purchasing equity or government securities.

We will buy government securities at auctions and will keep the portfolio churn at the lowest to ensure that costs do not shoot up. But returns will suffer, added another fund manager.

Most fund managers agreed to the fee as they did not want to lose the first mover advantage. SBI and UTI decided to bid for the business as they had already set up companies with a capital base of Rs 10 crore (Rs 100 million).

These companies were managing the government pension corpus. The fund managers are hoping that the fees are reviewed after three years, or as soon as the PFRDA Bill is approved by Parliament to provide statutory backing to the regulator.

PFRDA Chairman D Swarup, however, said that with all the fund managers agreeing to match UTIs bid, they have no reason to complain now.

However, not everybody is losing hope. A State Bank of India executive said its a long-term business and profit could be made only after a few years. Another executive at ICICI Prudential said the company was aware of the fact that it would  not be able to cover the costs, at least in the initial years.

But the good thing is that there are no marketing costs and operating costs are very low, he said.