Safety first

| Updated on July 25, 2021

The pension fund regulator should not chase returns through risky investments

Social and income security in old age has not received enough attention in the country, with the result that pension coverage in the country is quite low. It is, therefore, welcome that the Pension Fund Regulatory and Development Authority (PFRDA), that oversees the National Pension Scheme, has been bringing about a series of changes in recent months in a bid to push more people to save towards their retirement. However, the PFRDA’s latest move allowing pension funds to invest in initial public offerings is ill-advised and needs further deliberation. It is well known that publicly available information regarding stocks offered in IPOs is generally limited to that given in the prospectus, making these offers risky bets. Further, the offer price is often driven by demand and is mostly not in sync with the fundamentals of the company. Over-heated market conditions with raging demand for primary offers tend to distort IPO prices further. Many of the recent primary offerings have listed at hefty premiums, but they also carry risk of capital loss, which is best avoided in retirement portfolios.

While the PFRDA is leaning towards higher risk-taking with allowing investments in IPOs, it has however narrowed the investing universe of stocks to the top 200 stocks as measured by market capitalisation. The extant rule allowed pension funds to invest in companies with market capitalisation over ₹5,000 crore, which allowed funds to invest in more than 500 stocks. The new restriction is welcome as it will ensure that funds are parked in stocks with the best fundamentals. The regulator is also trying to help the government borrowing programme through measures such as increasing the limit for investment in government securities and allowing funds to invest in GILT exchange traded funds. This is not such a bad idea since these instruments carry little risk and give steady returns. Prudential measures such as stipulating that deposits with any one scheduled commercial bank should not exceed 10 per cent of the portfolio are welcome, too.

The PFRDA, however, should stop trying to lure investors to its ‘NPS corporate’ and ‘NPS all citizens’ schemes by offering them higher returns — in a bid to compete with other retirement products such as the EPF and PPF. Funds under NPS have been delivering healthy returns across time-frames; nudging them towards high-risk products will only result in increasing volatility in NAVs, eroding its credibility. Similarly, the Minimum Assured Return Scheme, currently being considered by the regulator, also appears unnecessary since NPS was positioned as a market-linked retirement product where investors make returns in line with market movement. Ultimately, the regulator needs to realise that the onerous rules regarding mandatory annuity on maturity and disadvantageous taxation vis-a-vis EPF and PPF are the main factors hampering the expansion of subscriber base. If NPS really wants to attract more subscribers, these aspects need to be addressed.

Published on July 25, 2021

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