NPS – Choice of investment pattern
b) Choice of investment pattern
1. The existing investment pattern prescribed for the Govt employees is broadly based on the guidelines stipulated by the Govt from time to time. Currently, the guidelines for the Govt sector are being revised broadly based on the Govt OM no 11/14/2013-PR dated 7th April 2015.
The Govt. guidelines stipulate investment of minimum 80% in fixed income securities- Govt securities and corporate bonds- which can go upto 95%.Investment in equity has been mandated between 5 to 15%.
2. As per the Bajpai Committee report (2015),
The design of the mandated investment norms in vogue today with predominance of low risk fixed income securities, that too mainly Government securities, has lower tolerance for risk, but a high tolerance level for lower returns especially in case of the Government Sector employees.
This is, in the opinion of this Committee, unfair for the investors who may need a combination of low risk with moderate returns or even higher returns with higher risks.
This is especially true for those in the early stages of their saving curve.
There can be no denying that in the pursuit of risk-free investment, investors are getting the short shrift and are therefore revealing a preference for physical assets.”
3. On the other hand, guidelines for the private sector allows the subscribers to allocate their contribution across the three asset classes – Equity, Corporate bonds and Govt securities with only restriction of investment in equity upto 50%.
Thus, on the grounds of parity, and keeping in view the spirit of the PFRDA act to allow choice of schemes, it is essential to revisit the framework for investment by the Central Government employees and allow them choice of investment as available to the Private Sector employees.
4. This has also been recommended by the Bajpai Committee ( 2015) as under:-
“Multiplicity of investment mandates across various Regulatory Regimes within the domain of pension sector creates an uneven playing field and therefore there is an urgent need to harmonise the same.
The existing investment norms across all regulatory regimes be harmonised, at least till such time as the move to a prudent investor regime is complete.
This creation of a harmonised regime will usher in transparency and allow investors to compare their returns across product platforms. A beginning can be made by harmonizing the investment guidelines within NPS across Government and Private Sector i.e. loosening the guidelines for Govt sector to allow more play to the Pension Fund managers in asset classes like equity, which are historically known to beat inflation across various countries in the long run.
5. It is also pertinent to mention that the capital market has also been evolving rapidly with new instruments being offered and the opportunities for investors growing.
With the shift of burden of funding the retirement income resting on the employee, it is important to create a facilitating environment to enable him to plan his retirement
judiciously through prudent investments based on his risk appetite.
6. The opening of the Govt sector, which comprises the majority of the AUM of the NPS, will have cascading impact on the development of the capital market, and the development of the economy as a whole.
A step in this direction has already been taken by the Govt by mandating minimum 5% investments in the equity in its OM no 11/14/2013-PR dated 7th April 2015. Harmonisation of the investment guidelines between private and Govt sector will also pave way towards a more unified pension regime in the country.
The opening of the choice to the Central Govt employees would be a first step in opening the choice to all the NPS subscribers as under:-
a) Choice of Pension Funds across all pension funds to all the subscribers under NPS including Govt Sector employees ( APY is a DB cum DC scheme and hence will be out of the purview )
b) Choice of investment pattern ( Choice of equity , Debt and Govt Securities) across all pension funds to all the subscribers under NPS including Govt sector employees . ( APY is a DB cum DC scheme and hence will be out of the purview)
Note: Comments may be offered vide e-mail on [email protected] or in hard copy to the below address
Ms.Sumeet Kaur Kapoor
Pension Fund Regulatory and Development Authority
1st Floor, Chatrapati Shivaji Bhawan
B-14/A, Qutub Institutional Area