PFRDA plans higher equity exposure, new asset classes to boost NPS returns

Regulator plans gradual shift towards 25% equity in government composite scheme and new asset classes, including AIFs, to support long-term returns

The Pension Fund Regulatory and Development Authority (PFRDA) is pushing for higher equity exposure and a gradual expansion of permissible asset classes under the National Pension System (NPS) to sustain long-term returns in a declining interest rate environment, Chairperson Sivasubramanian Ramann said on Friday.

 

The regulator has increased equity exposure in the government composite NPS scheme to 19 per cent from 15 per cent and expects allocations to rise further towards the newly permitted ceiling of 25 per cent. Ramann said pension funds are likely to move gradually towards this limit in line with demand from government employees seeking higher equity allocation. 

As equity exposure rises, corporate bond holdings have eased marginally, while the share of government securities has remained broadly stable. The rebalancing comes amid expectations of softer government bond yields over the long term, prompting the regulator to explore new asset classes to preserve return profiles.

 

“If you look at the share of G-secs compared to last year, it is about the same. Equity has gone up a bit, and corporate bonds have come down slightly. Since we have allowed equity to rise from 15 per cent to 25 per cent for the largest scheme, which is the government composite scheme,” Ramann said, adding that equity has gone up to about 19 per cent. “Therefore, I think corporate bonds has as a group come down a little bit,” said Ramann.

 

“The pension funds would probably like to move up to 25 per cent equity in that scheme. That is also the demand from government employees, who feel they are underweight on equity,” he added.

 

The PFRDA is also preparing to begin investments in alternative investment funds (AIFs), a new asset class for the NPS. While no allocations have been made so far, operational systems are in place and the first investments could be made before the end of the current financial year.

 

“We have not put any money into it till now. We’ve created the structure, and the operating systems are in place. We should be able to have money flowing into AIFs fairly soon,” he said.

 

The regulator has also permitted limited exposure to gold and silver exchange-traded funds within the alternatives bucket, subject to strict caps.

 

Beyond portfolio diversification, the PFRDA is working on a market-linked assured return product. The proposed structure may not offer a hard guarantee but could deliver returns within a specified band, reducing guarantee costs while remaining more attractive than traditional annuities. Ramann indicated that a limited band of returns could be more viable than a fully guaranteed product.

 

Separately, the regulator is piloting a medical savings-linked initiative under the NPS framework in collaboration with pension funds and healthcare providers. The proposal involves creating a dedicated medical corpus, effectively a self-funded deductible that can be used for hospital and diagnostic expenses. Pension funds are in discussions with health insurers to offer group top-up insurance plans above the subscriber’s deductible.

 

One pilot, led by ICICI Pension Fund, involves a tieup with Apollo Hospitals to offer preferential rates to NPS subscribers through aggregation benefits. Other experiments under discussion include structured topup insurance products in which subscribers maintain a minimum self-pay amount, potentially ₹50,000, to access higher coverage at competitive group rates.

 

The regulator said instant settlement to hospitals, backed by pension-managed funds, could make the model more attractive than existing government reimbursement systems. The initiative is positioned as a long-term medical emergency fund rather than an insurance product, aimed at improving health coverage penetration.

 

The PFRDA is also seeing interest from banks in setting up pension fund subsidiaries. Enquiries have been received from at least two banks, including ICICI Bank and Axis Bank, with processes underway. A consortium led by Union Bank of India and Indian Bank is also exploring entry through a bank-dominated structure. The application window remains open until March 21, the chairperson said.

 

On distribution, the PFRDA is developing a digital gateway with the National Payments Corporation of India to integrate NPS onboarding with UPI-based platforms and third-party application providers. The aim is to enable seamless, three-step account creation and tap into India’s large digital payments user base.

 

Addressing developments at GIFT City, Ramann said there would be no regulatory overlap between domestic pension funds and those set up in the International Financial Services Centre. Pension funds established at GIFT City fall under the jurisdiction of the International Financial Services Centres Authority and operate within a separate foreign jurisdiction framework.