The Pension Fund Regulatory and Development Authority (PFRDA) is hopeful that the government will allow a hike in the equity investment limit for government sector National Pension System (NPS) from 15% to 50%. For this, PFRDA has proposed an action plan. PFRDA has proposed hiking the equity investment by allowing life-cycle funds.
However, this may not happen anytime soon as PFRDA is still awaiting a formal notification from the government. “NPS for the government sector was designed by the government so it’s up to the government to increase the equity limit. The government is yet to think seriously about it,"said Kumar Sharadindu, managing director and chief executive officer, SBI Pension Funds Pvt. Ltd.
The genesis for a hike in equity allocation even for government sector employees is in the recommendation of the G.N. Bajpai Committee report that seeks to harmonise investment guidelines for government and private sector NPS. While the equity investment limit for the private sector has already been hiked to 75%, there is no word on hike in the equity limit for government employees to 50% yet. Central government employees (except armed forces) who joined services from 2004 are part of the NPS; even employees of most state governments are in it.
Unlike private NPS where subscribers can choose the fund managers and the funds, government NPS offers no choices for either. The money is invested in a pre-decided proportion across three state-run fund managers—SBI Pension Funds Pvt. Ltd, UTI Retirement Solutions Ltd and LIC Pension Fund Ltd—and the caps in each asset class are clearly defined. According to rules, each of the pension fund managers can invest up to 50% in government securities, up to 45% in debt instruments, up to 5% in short-term debt instruments, up to 15% in equities and up to 5% in structured securities and other miscellaneous investments.
What could change
Things will change if the government gives its nod to hike the equity investment limit.
Choice of funds: According to a PFRDA official who didn’t want to be named, government employees may get three more options, in addition to the existing option, which will be the default option.
The first will allow subscribers to invest 100% of their funds in government securities. The second and third options will allow for equity exposure through passive or life-cycle funds (see graph).
At present, under private NPS, subscribers who are confused about their asset allocation are offered three life-cycle funds that take exposure to equities depending upon their risk appetite and years left to maturity—conservative, moderate and aggressive. The government sector NPS will allow a hike in equity investments by allowing subscribers to invest in equities either through conservative or moderate life-cycle strategy.
The conservative life-cycle plan under private NPS is meant for risk-averse investors, as the maximum allocation to equity is 25% till 35 years of age. After that the equity allocation begins to taper and by the time the investor is 55 years of age, the equity allocation is only 5%. The moderate life-cycle fund starts with a 50% allocation to equity till 35 years of age and tapers it to 10% by age 55. The aggressive life-cycle fund starts with equity allocation of 75% till 35 years of age and tapers it to 15% by age 55.
A life-cycle based approach not only optimises returns but also cushions you from market volatility as you approach maturity.
Choice of fund managers: In addition to offering the employees the choice of funds, what is also on the cards is allowing private sector pension fund managers to manage the government corpus and also to allow employees the option to choose their fund managers.
As on 30 April, the subscriber base of government sector NPS was around 58 lakh with assets under management (AUM) of around ₹ 2.03 trillion, the subscriber base for private sector was around 14 lakh with an AUM of ₹ 27,982 crore.
Allowing private fund managers to manage the government corpus will not only increase the choice for subscribers and aid market competition, but will also help fund managers sustain a low-cost model. While the action plan may be in place, a government approval is needed. This means the wait is not over yet.