Pension gets a stronger equity push
Equity investment limit increased to 75% in one NPS fund; and EPF doubled its equity limit to 10%
Saving for retirement is a long-term goal and you need equity to reach there comfortably. Recognizing this, the pension sector this year opened its doors a bit more for equity investments.
For the National Pension System (NPS), the Pension Fund Regulatory and Development Authority (PFRDA) increased the equity investment limit from 50% to 75% through a life-cycle fund. This fund follows a pre-determined asset allocation plan based on your age and is meant for those who need help in deciding their asset allocation.
This decision was based on recommendations by the Bajpai committee to ultimately allow 100% investment in equities.
Equity for EPF
Even the Employees’ Provident Fund (EPF) doubled its equity investment limit from 5% to 10%. It started equity investments in August last year by investing 5% of the incremental corpus through exchange-traded funds (ETFs). For financial year 2017 (FY17), the Employees’ Provident Fund Organisation (EPFO) will invest 10% of the incremental corpus, or about Rs13,000 crore, in equities through ETFs. But even after more than a year has passed, EPFO is yet to devise a methodology to account for the returns from these equity investments. So, the gains, if any, do not reflect in the EPF interest rate.
“Equity exposure is the major thing that has happened for EPF. They should gradually increase it to 15%; it is a safe limit,” said Prakash Praharaj, a Securities and Exchange Board of India (Sebi) registered investment adviser. According to regulations, 15% is the maximum that EPF can invest in equities.
While the EPF interest rates decreased in 2016, the product remains an attractive one in the debt space. For FY17, EPFO has recommended a cut of 15 basis points (bps) for EPF—from 8.8% in FY16 to 8.65%. But EPF still returns 216 bps more than the 10-year government bond yield of 6.49%. Even the Public Provident Fund (PPF) offers a rate of 8%. In the current interest rate climate, EPF’s return of 8.65% is one of the best among tax-free debt vehicles. One basis point is a hundredth of a percentage point.
This year also saw PFRDA choosing pension fund managers (PFMs) for a fourth time since 2009, when NPS was made available to the private sector.
This was the third auction, but the rules were more relaxed. Instead of racing to the bottom, PFRDA capped the fund management fee to 0.1% or 10 bps—currently it is 0.01%. PFMs were allowed to bid within this cap; the bottom 10 will qualify to be PFMs.
But only nine companies have bid. Of these, eight were existing PFMs and one—DSP BlackRock Investment Managers Pvt. Ltd—applied for the licence a second time. The first time it became a PFM was in 2012 when PFRDA did away with the auction process. But in 2014, the auction process was reintroduced. The lowest pension fund management cost was fixed at 0.01%. Finding it too low, DSP Blackrock had pulled out of the race.
“This (auction) is a positive step as it allows companies to assess their costs and charge a fund management fee accordingly,” said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd. “But for customers, the biggest step has been the fact that they can now open NPS accounts completely online as PFRDA has recognised Aadhaar based e-signatures, doing away with the need to send a physical form,” Shukla added.
e-NPS was a big draw. “In the case of private sector, e-NPS saw a lot of traction as more accounts were opened through this,” said B.S. Bhandari, whole time member-Economics, PFRDA.
The 2016 Union Budget, too, had good news for NPS—maturity corpus was made partially tax exempt. In NPS, 40% of the corpus has to be annuitised on maturity. The remaining 60% can be taken as lump sum, which was taxable till last year. From FY17, withdrawal up to 40% of the corpus at the time of retirement will be tax exempt.