PFRDA announces investment norms for new pension fund managers

The Pension Fund Regulatory Development Authority (PFRDA) has announced investment norms for new managers of the pension contributions of individuals outside government service, who would join the New Pension Scheme (NPS) from next month.

Private individuals will be allowed to chose a fund manager as well as investment options, including equity that meets their risk appetite.

A panel headed by HDFC chairman Deepak Parekh with Ravi Narain, Bakul Dholakia, Prithvi Haldea, Susan Thomas as members and and Gyan Bhushan as member secretary appointed by PFRDA has recommended three investment options classified as 'conservative', 'moderate' and 'growth' depending on the risk-reward profile of underlying instruments. Members of the scheme can decide how much of their contribution should go to which of these asset classes.

Depending on their choice, their contribution will go into government securities, corporate bonds or the shares of companies represented in the National Stock Exchange's benchmark 50 share Nifty Index, PFRDA chairman D Swarup said.

For those who do not want to decide on how much of their contribution should go into which scheme, the regulator has an 'auto choice.' Depending on the age of a member at the time of joining the scheme, the investments in each of these schemes will vary.

At the lowest age entry, 65 per cent of the investment will go into high risk, high return equity market instruments, 10 per cent in low return low risk securities like government bonds and 25 per cent in medium return for credit risk instruments such as corporate bonds. The proportion of investments in these categories will change as per the age, with equity instrument investments being limited at 10 per cent at the age of retirement. 

The New Pension System (NPS) proposed in the OASIS (Old Age Social and Income Security) report (2000) represents an important break with traditional ideas about the organisation of pensions systems in India.

The key features of the NPS are:

• It will be regulated by an independant regulator, the Pension Fund Regulatory and
• Development Authority (PFRDA).
• It will be a defined contribution (DC) system.
• Contributions are in individual accounts.
• A main premise of the pension fund management in NPS was minimising cost.

All account information will kept at a Central Recordkeeping Agency(CRA) rather than with pension fund managers (PFMs).

The contributions will be collected and passed on through to the PFMs through the CRA, which minimises the cost of both record maintenance and funds move- ment. In addition, it preserves competitive pressure by making it easy for par-ticipants to switch from one PFM to another, and removes the possibility of PFMs impeding switching.

The funds will be managed using a passive management strategy by PFMs selected by the PFRDA. The selection of the PFMs would be done through an auction, where bids were made for the lowest cost of fund management.

While the NPS will be available to all individuals from 1 April 2009, it is mandatory for all government employees who have joined service after 1 January 2004.