Panel moots 100% equity investment for pension

An expert panel set up by the Pension Fund Regulatory and Development Authority (PFRDA) has suggested that non-government subscribers to the new pension scheme (NPS) be allowed to invest their entire savings in equity instruments.

In its report submitted today, the panel, headed by HDFC Chairman Deepak Parekh, has also recommended the “auto choice” option, under which fund managers can change the debt-equity investment mix, depending on the age profile of the subscriber. This is proposed to be made the default option, which will come into play if an investor does not provide his or her preferred investment mix. Under the default option, the younger the subscriber, the higher will be the amount invested in equity. Debt investment will rise as the subscriber gets older. This is to protect the aging subscriber from market uncertainties.
 

PENSION’S E-C-G

*An investor can opt for investing his entire corpus in equity (E), corporate and state government debt papers (C) or central government securities (G)

*There will be a default option where investment pattern will vary according to age

*The pattern will change once the investor turns 36. After that, there will be smaller allocation for equity

*Investment should be in Nifty 50 stocks

*Minimum investment of Rs 6,000 a year in pension schemes likely

The expert committee has also recommended that equity investments should be limited to Nifty-50 companies. “The expert group has suggested that equity participation be done through a standardised portfolio, implemented through an index fund only. The index fund recommended is Nifty 50,” said Parekh. The net of the companies may be widened beyond the Nifty 50 over a period of time, said PFRDA Chairman D Swarup. PFRDA will finalise investment guidelines by the end of this month.

The NPS Trust, which oversees the functioning of the new pension scheme, will meet tomorrow to consider broad investment guidelines

Over the next few days, six fund managers led by UTI will also be formally confirmed by the NPS Trus and the board.

The expert group has recommended a simple structure of “E” (equity), “G” (central government securities) and “C” (corporate and state government debt papers) investment choices. The subscriber, who may be required to contribute at least Rs 6,000 per annum, will choose the mix of his investment in each category.

A person can put 100 per cent contribution in equity or any other option as well as choose a pension fund manager (PFM) out of a pool of six.

PFRDA has also selected 23 entities that will work as Points of Presence (PoP) across the country and collect subscriptions from investors. The service charge per subscriber will be Rs 40 for registration and Rs 20 per transaction.

Category “G “includes all central government securities, liquid funds of mutual funds and fixed deposits of certain banks. The “C” category includes state government bonds, bonds of state-owned companies, bonds issued by municipal bodies and infrastructure funds. The “G” and “C” category securities or funds will have to meet certain criteria prescribed by PFRDA to be eligible instruments of investment, but will not be tied down to credit ratings only, according to Prithvi Haldea, a member of the panel.

Under the “auto choice” category, for the lowest age of entry, the auto choice will start at 65 per cent in equity, 10 per cent in central government securities and liquid funds and 25 per cent in corporate and state government bonds. The investment pattern will remain unchanged till the person turns 36.

From 36 years onwards, the weight of equity and corporate security would decrease and the weight of central government bonds would increase annually till it reached 10 per cent in equity, 10 per cent in corporate bonds and 80 per cent in central government securities, said Parekh.

Auto choice funds will be split equally among the six PFMs at the cost quoted by them. The investment norms will be reviewed after three years.

The pension regulator is keen to ensure that the pension fund managers start operations by April 1.

In case of government pension funds, which is based on 10 per cent contribution from the employees and the employer, the investment norms allow a maximum 15 per cent exposure to equity.