NPS plans new schemes with more equity exposure

Hoping to cater to varying risk appetites as it tries to popularise the National Pension System (NPS), the pension regulator now plans to introduce two new life cycle investment options for private sector members.

While one would allow investments up to 75 per cent of the portfolio in equities, the other would allow just 35 per cent.

The up to 75 per cent allocation in equities or the “aggressive life cycle fund” will allow 10 per cent of the portfolio to be invested in corporate bonds and the remaining 15 per cent in government securities until the subscriber reaches the age of 35 years.

For the risk averse, the Pension Fund Regulatory and Development Authority (PFRDA) has also proposed a “conservative life cycle fund” option that will invest just 35 per cent of the contributions in equities, 45 per cent in corporate bonds and 30 per cent in government securities.

“While returns on investments under defined contribution scheme cannot be guaranteed, it is important to frame guidelines, which enable pension funds to deliver good real rate of returns to the subscriber for meaningful old age income security, which cannot be done with overload of fixed income securities,” said a concept paper floated by the PFRDA on revamping the NPS.

“With more awareness about financial planning, investors want additional options. We have sought public comments on the plan that is likely to be rolled out by the year end,” said an official. The life cycle or default option under the NPS is one of the more popular alternatives and allows the management of investment of funds automatically based on the age profile of the subscriber. After the subscriber reaches the age of 35, the investments are more risk averse favouring corporate and government bonds.

At present, NPS for private citizens provides a default option that allows for equity allocation of up to 50 per cent of the portfolio until the investor reaches the age of 35.

The need for at least two more life cycle funds was also highlighted by the expert committee set up under former SEBI Chairman GN Bajpai in its report in September 2014.

The new concept paper by the PFRDA has also called for making the existing default life cycle option “more dynamic and reviewing the current pattern of investments based on the market conditions.”

Further, it has recommended exploring the possibility of a fourth life cycle fund with an alternative asset class that is capped at 5 per cent of the portfolio.

At present, the NPS for private citizens (corporate and unorganised sector) has nearly 6.9 lakh members and assets under management of over ₹9,500 crore but both the Finance Ministry and the PFRDA have stressed that more people need to come under its coverage.

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