NPS schemes get a new classification: What PFRDA's revised framework means for your investment choices

The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a standardised framework for classifying, naming and displaying investment schemes under the National Pension System (NPS) for subscribers in a circular dated 28 August.

The move is aimed at making it easier for NPS investors to compare schemes offered by different pension funds before choosing where to invest their retirement savings.

Here is what NPS subscribers need to know.

What has PFRDA changed?

NPS schemes will now be presented under five broad types:

• Lifecycle-based schemes: These schemes automatically adjust the allocation among equity (E), corporate bonds (C), and government securities (G) as the subscriber gets older. They include Life Cycle Aggressive, Life Cycle 75 – High, Life Cycle 50 – Moderate, and Life Cycle 25 – Low options.
• Active Choice: Subscribers decide how their contributions are allocated across equity, corporate bonds and government securities, subject to the investment limits prescribed by PFRDA.
• NPS Sanchay: This is a scheme for the informal sector, with a pre-defined investment pattern.
• Multiple Scheme Framework (MSF): Under the new framework, all existing and new MSF schemes will be placed into standardised categories based on their equity exposure.
• 4A schemes: These are curated or thematic schemes introduced under Regulation 4A, such as NPS Vatsalya, NPS Swasthya and NPS MSME.

The new framework also ends the earlier distinction between Common Schemes and MSF Schemes.

What do the new MSF categories mean for investors?

MSF schemes will be divided into five categories:

• Category A: 80%-100% equity — Aggressive Growth, very high risk
• Category B: 60%-80% equity — High Growth, high risk
• Category C: 35%-60% equity — Balanced Growth, medium risk
• Category D: 10%-35% equity — Conservative
• Category E: 0%-10% equity — Debt-oriented

This gives investors a clearer indication of the level of equity market exposure and the associated risk they are taking.

What changes can investors expect in MSF schemes?

Existing MSF schemes that currently span more than one equity category will have to be modified, restructured, or reclassified into a single category. Pension Funds must also rename existing MSF schemes using the new standard naming format. These changes have to be completed within 30 days.

MSF schemes will follow a standard naming format.

• Pension Fund abbreviation + “NPS” + category code + scheme name

Tier 2 schemes will mention “Tier 2” at the end, with Category A indicating the highest and Category E the lowest equity exposure.

A Pension Fund can offer up to two schemes under each MSF category in each Tier. Where more than two currently exist in a category, they will have to be merged, subsumed or suitably restructured within 45 days, after informing subscribers.

If an MSF scheme is wound up, subscribers will be given a choice to move to another scheme. If they do not make a choice, their investment will be shifted to the Life Cycle 50 – Moderate (10E/55Y) scheme of the same Pension Fund under Tier I.

Will new framework change how investor chooses NPS scheme?

Yes. PFRDA has standardised how NPS schemes are presented and displayed across CRA platforms and other subscriber-facing onboarding channels. The options will be shown in the following sequence:

• Type of Scheme (MSF/Lifecycle based/ Active choice/ NPS Sanchay/ 4A)
• Category of the MSF Scheme/Lifecycle funds/ Asset allocation in case of Active choice
• Selection of the Pension Fund

Before selecting a Pension Fund, investors will be able to view schemes offered by different Pension Funds under the selected category, along with key details such as launch date, historical returns, benchmark performance, charges, Risk-o-meter, AUM, etc.

This could make it easier to compare two schemes that follow a similar investment approach but are managed by different Pension Funds.

Can you invest in more than one NPS scheme?

Yes, but there are restrictions. A subscriber can hold only one Lifecycle-based or Active Choice scheme at a time under the same PRAN. However, multiple MSF schemes can be held simultaneously.

Subscribers can also make up to two requests in a financial year for changing their Pension Fund, scheme, or both.

What happens when an investor changes or merges schemes?

Switching between MSF, Lifecycle, Active Choice, and Sanchay schemes will not reset the original vesting period or other applicable account conditions. The vesting period will continue to be counted from the original account-opening date.

However, merging is different from switching schemes. A subscriber holding multiple schemes can choose to merge one scheme into another, which becomes the target scheme.

If a subscriber switches from Scheme A to Scheme B, the original vesting period and account-level conditions continue to apply. However, if Scheme A is merged into Scheme B, the investment becomes subject to Scheme B’s rules, including its vesting period, withdrawal limits and other conditions.

Disclaimer: This is for informational purposes only. Please visit the official website for the latest updates.