While the private sector National Pension System (NPS) is set to increase the equity investment limit in the direct or active choice option to 75%, according to a recent board meeting, the equity limit for governemnt NPS is still at 15%.
But the Pension Fund Regulatory and Development Authority (PFRDA) is hopeful that the government will allow a hike in equity investment limit for government NPS as well, from 15% to 50%, said chairman Hemant Contractor in an interview with Bloomberg last month.
As of now, private NPS allows up to 50% investment in equities directly and 75% through life-cycle based strategy; the equity limit will move up to 75% even under the direct or active choice, as per a recent board decision.
While central government employees (except for armed forces) who joined services from 2004 were moved to NPS first, it was only in 2009 that NPS opened doors for the private sector. State governments implemented NPS after that.
In case of government NPS (Centre and state), employees can’t choose the investment limits or the fund manager. The money is invested in a specific proportion across three state-run managers—SBI Pension Funds Pvt. Ltd, UTI Retirement Solutions Ltd and LIC Pension Fund Ltd—and the caps in each asset class are defined.
Each pension fund manager can invest up to 50% in government securities (G-secs), up to 45% in debt instruments, up to 5% in short-term debt, up to 15% in equities and up to 5% in structured securities and other miscellaneous investments. The current fund management charge (FMC) of government NPS is 0.0102%.
Private sector NPS is voluntary and the choice of fund managers and investment fund rests with the subscriber.
You can choose among eight fund managers and four investment schemes. Scheme G invests in G-secs, scheme C in fixed income instruments other than G-secs, scheme E in equities and scheme A in alternative investment funds. You can put your money in any of the four schemes in the proportion you like, but scheme E currently has a cap of 50% currently and scheme A has a cap of 5%.
You can also opt for a life-cycle based allocation where you can start with a 75% exposure to equities. The current FMC for private NPS is 0.01%.
The G.N. Bajpai committee report that reviewed investment guidelines of government and private NPS, recommended harmonizing investment guidelines, and a step in that direction is to increase equity allocation to 50%.
For instance, as per the recent updated data, the government NPS returned an average of 9.02% (average from three fund managers) and for the same time period, assuming 50% was invested in equities and 50% in G-secs, private NPS would have returned close to 9.96% (average return from the five fund managers that were operational during the time period chosen see graphic for details).
“If we compare someone’s return who has chosen 50% equity to that of government employees (where equity is 15%), the difference in return is about 100 basis points,” said Kumar Sharadindu, managing director and chief executive officer, SBI Pension Funds.
The Bajpai report also proposes allowing private fund managers to manage government NPS and letting employees choose their fund manager and asset allocation. “Giving an option to government employees to choose pension funds and asset allocation has been under consideration for some time. An immediate outcome is not expected,” said Sharadindu. The changes will increase transparency and flexibility for government employees.[“Source-livemint”]