NPS rules changed: PFRDA orders scheme revamp, new risk categories

Pension funds must align existing offerings with a common framework, while subscribers could see scheme mergers, restructuring and clearer disclosures

The Pension Fund Regulatory and Development Authority (PFRDA) has tightened the framework governing investment schemes under the National Pension System (NPS), making scheme names, risk levels and performance easier for subscribers to compare.

 

According to two circulars issued on August 28, pension funds have been given 30 days to rename existing Multiple Scheme Framework (MSF) schemes and bring schemes that span more than one equity category into a single prescribed category. Funds with more than two schemes in the same category will have 45 days to merge, subsume or restructure them.

 

For NPS investors, the changes are important because some scheme names and structures may change, although this does not mean that every subscriber will have to immediately switch investments.

 

 

Five new equity-based categories

PFRDA has created a standardised classification system for MSF schemes based on their equity allocation. The idea is to make it easier for investors to understand the level of equity exposure and therefore the broad risk they are taking.

 

The categories are:

 

Category A: 80-100 per cent equity — aggressive growth, very high risk

 

Category B: 60-80 per cent equity — high growth, high risk

 

Category C: 35-60 per cent equity — balanced growth, medium risk

 

Category D: 10-35 per cent equity — conservative

 

Category E: 0-10 per cent equity — debt-oriented

 

A scheme cannot have an equity mandate covering multiple categories. For example, a scheme cannot have an equity range that moves between Category B and Category C. It must fit within one prescribed category.

 

This is particularly relevant for subscribers who choose NPS schemes based on their risk appetite. The new structure should make it less difficult to compare schemes offered by different pension funds.

Scheme names will change

PFRDA has also prescribed a common naming format for MSF schemes. The name will include the pension fund's abbreviation, "NPS", the relevant category code and the scheme name.

 

For Tier II, "Tier 2" will be added at the end of the name.

 

The regulator has asked pension funds to rename existing MSF schemes within 30 days of the August 28 circular. Schemes that currently have equity mandates covering multiple categories must also be modified, restructured or reclassified within the same period.

 

This means subscribers could see changes in the names of schemes appearing on their NPS or Central Recordkeeping Agency (CRA) platforms over the coming weeks.

Fewer schemes under each category

PFRDA has also restricted the number of MSF schemes a pension fund can offer. A fund can voluntarily offer up to two schemes under each category for each Tier.

 

If a fund already has more than two schemes within a category, it will have to merge, subsume or otherwise restructure the excess schemes within 45 days. Subscribers must be informed and the prescribed process for winding up a scheme has to be followed.

 

For investors, this could mean that an existing scheme is eventually combined with another scheme. It is therefore important to read communications from the pension fund rather than assuming that a change in the scheme name is merely cosmetic.

 

More information before investors choose

The new framework also seeks to improve the information available when a subscriber selects an NPS scheme.

 

PFRDA says subscriber-facing platforms should display schemes in a standard sequence, allowing investors to first identify the type of scheme and category and then select a pension fund.

 

Before selecting a pension fund, investors should be able to compare information such as:

 

scheme name and pension fund;

 

launch date;

 

historical returns;

 

benchmark and benchmark returns;

 

charges;

 

riskometer; and

 

assets under management.

 

This is significant because NPS returns should not be viewed in isolation. Comparing performance with the relevant benchmark and understanding the risk taken to generate those returns can give investors a better basis for choosing a scheme.

What happens if a scheme is closed?

 

If an MSF scheme is wound up, subscribers will be given the option to move their investment to another scheme.

 

If a subscriber does not make a choice, PFRDA has specified a default destination: the Life Cycle 50 – Moderate (10E/55Y) Scheme of the same pension fund under Tier I.

 

This makes it important for investors to act when they receive a communication about a merger or closure instead of allowing the default option to take effect without understanding it.

 

Existing NPS investors need not panic

 

The changes are primarily about standardising how schemes are classified, named, presented and disclosed. PFRDA has discontinued the earlier distinction between "Common Schemes" and MSF schemes, with all NPS schemes now to be classified under the new framework.

 

However, the new classification circular does not apply to accounts tagged to the Government sector.

 

For non-government NPS subscribers, the practical takeaway is simple: check the new scheme name, equity category, riskometer, charges and benchmark when the pension fund updates its offering. A change in nomenclature by itself does not mean that an investor needs to make a fresh investment decision, but a restructuring or merger may require attention.

 

PFRDA's stated objective is to make NPS schemes more comparable and help subscribers make informed investment choices.