More Life Cycle Funds to the NPS subscribers to cater to both Less risk taking and High Risk taking NPS subscribers – Proposal of PFRDA
PFRDA has proposed for more Life Cycle funds to NPS subscribers.
Annexure B -For Public and Stakeholders Comments
Subject: Providing option of more Life Cycle Funds to the NPS subscribers
A. Launch of NPS and Current scenario
1. The National Pension System (NPS) was introduced in
2003 for all Central Government employees (except armed forces) who
joined the service on or after 01.01.2004. The NPS marked a paradigm
shift from the Defined Benefit Pension Scheme to Defined Contribution
Scheme, thereby easing the escalating fiscal stress on the Government on
account of rising pension liabilities. In 2009 different Schemes under
the flagship of National Pension System regulated by PFRDA under the
private sector and unorganized sector.
2. The National Pension System (NPS) has been arguably
hailed as one of the best designed pension products domestically with
its several unique features like full portability across jobs and
geographical jurisdictions, choice of investment options to suit
different risk appetites, option to choose from among several fund
managers, no entry or exit loads, and perhaps the lowest fund management
charges in the world. It is also regulated by a dedicated regulator.
3. The passage of the PFRDA Act in September 2013
followed by notification of the Act on 1st February 2014 marks an
important milestone in the history of the Pension Sector reforms as the
Act provides an overarching mandate to the PFRDA for promotion and
development of old age security in India. In light of the paradigm shift
in the pension landscape in the country, it is imperative to review the
progress of NPS so far and realign the existing policy framework for
Pension Funds within the mandate of the Act.
4. The NPS adopted a direct selling model to keep the
costs low and to avoid the urge to mis-sell due to the embedded
commissions. This distributor-free and agent-free model was designed to
protect the individual and to maximise the pension wealth. It was
adopted even at the risk of a slow start. The NPS architecture has been
designed to create an enabling environment for the citizens to save for
retirement.
5. Additionally, NPS also provides flexibility to
subscribers where they can switch their pension funds among three
options, i.e. equity, corporate bonds and government securities. They
can also change their fund managers if they are not satisfied with the
performance of Pension Funds.
B. Need of Revamping
• It is more than 12 years under NPS Govt. Sector and 6
(six) ) year since NPS was introduced in the market to cater to the
retirement needs of Private Sector/Unorganised Sector subscribers.
• The NPS has made noticeable progress from the time of
its inception, on boarding about 1 Crore subscribers with a total AUM
exceeding 100000 crores by Dec 2015, with only 12% of the workforce
covered by any kind of old age security in India, there is thus a huge
untapped potential for NPS to expand. However, this would require
multipronged approach with co-operation of multiple stakeholders
including Central Government, State Governments, Autonomous bodies,
trade bodies, Regulators and many more.
• Besides the expansion in coverage, the provision of
old age income security also entails working towards adequacy of income
post working life, which can be done by optimizing returns through
appropriate investment guidelines. While devising the investment
guidelines, the interest of the subscriber is to be kept paramount,
balancing the security aspect with adequacy of returns. While returns on
investment under DC scheme cannot be guaranteed, it is important to
frame guidelines, which enable the pension funds to deliver good real
rate of returns to the subscriber for meaningful old age income
security, which cannot be done with overload of fixed income securities.
Hence, an enabling environment is required to be created for the
Subscriber to maximize his/her returns depending upon his/her risk
appetite.
• The fiscal stimulus being provided by the Government
each year through its budget announcements are a major boost to the NPS ,
propelling the built up of a pensioned society.
• The experience gained since last more than decade this
has been quite obvious that the NPS system has a well laid out
architecture, it has been able to draw enough attention from the
individual subscribers by very little marketing and publicity. It is
also perceptible that investor awareness towards the various financial
products has grown to the extant where subscribers can decide about the
mix of asset class and Pension Fund and change the same as per its
discretion.
PROVIDING OPTION OF MORE LIFE CYCLE FUNDS TO THE NPS SUBSCRIBERS
1. The Expert Committee headed by Shri G. N. Bajpai was
constituted in September 2014 to review investment guidelines for NPS in
Private Sector with various terms of reference. One of the TORs was to
reviewing the default scheme viz Life Cycle Fund.
2. The recommendations of EXPERT COMMITTEE TO REVIEW
INVESTMENT GUIDELINES FOR NPS SCHEMES IN PRIVATE SECTOR handed over its
report to PFRDA. The committee has given following deliberation on the
said TOR as below:
“On the road to Prudent investor regime, the Regulator may, in the interim allow introduction of a few new schemes to test the risk appetite of the subscribers and build their confidence in asset classes perceived to be riskier viz Equity through the life Cycle fund approach. While the existing life cycle Fund shall continue to be the one with maximum investment in equity pegged at 50% (option LC50), more life cycle funds (at least two more to begin with) may be introduced keeping the core principle of “decreasing risk appetite with increasing age” intact with lower and higher ceilings in Equity to cater to both conservative subscriber and subscriber with a higher risk appetite.”
3. Further, one of the measure suggested by the said
committee is to shift away from the fixed income fixated investment
pattern and allowing more play to pension fund managers in equity, as a
part of first phase to move to Prudential investor regime:-
“Allowing floating of life cycle funds with equity cap at 75%”.
4. Presently, NPS provides Life Cycle Fund option to the
NPS subscriber with equity allocation up to 35 years is 50%. The
agewise allocation of the Fund in these two Life Cycle Fund across the
asset class `E’ , ‘C’ and `G’ is as under:-
Table:-1
Age | Asset Class E | Asset Class C | Asset Class G |
Up to 35 years | 50% | 30% | 20% |
36 Years | 48% | 29% | 23% |
37 Years | 46% | 28% | 26% |
38 years | 44% | 27% | 29% |
39 years | 42% | 26% | 32% |
40 years | 40% | 25% | 35% |
41 years | 38% | 24% | 38% |
42 years | 36% | 23% | 41% |
43 years | 34% | 22% | 44% |
44 years | 32% | 21% | 47% |
45 years | 30% | 20% | 50% |
46 years | 28% | 19% | 53% |
47 years | 26% | 18% | 56% |
48 years | 24% | 17% | 59% |
49 years | 22% | 16% | 62% |
50 years | 20% | 15% | 65% |
51 years | 18% | 14% | 68% |
52 years | 16% | 13% | 71% |
53 years | 14% | 12% | 74% |
54 years | 12% | 11% | 77% |
55 years | 10% | 10% | 80% |
Table:-2
Aggressive Life Cycle Fund | |||
Age | Asset Class E | Asset Class C | Asset Class G |
Up to 35 years | 75% | 10% | 15% |
36 years | 71% | 11% | 18% |
37 years | 67% | 12% | 21% |
38 years | 63% | 13% | 24% |
39 years | 59% | 14% | 27% |
40 years | 55% | 15% | 30% |
41 years | 51% | 16% | 33% |
42 years | 47% | 17% | 36% |
43 years | 43% | 18% | 39% |
44 years | 39% | 19% | 42% |
45 years | 35% | 20% | 45% |
46 years | 32% | 20% | 48% |
47 years | 29% | 20% | 51% |
48 years | 26% | 20% | 54% |
49 years | 23% | 20% | 57% |
50 years | 20% | 20% | 60% |
51 years | 19% | 18% | 63% |
52 years | 18% | 16% | 66% |
53 years | 17% | 14% | 69% |
54 years | 16% | 12% | 72% |
55 years | 15% | 10% | 75% |
Conservative Life Cycle Fund | |||
Age | Asset Class E | Asset Class C | Asset Class G |
Up to 35 years | 25% | 45% | 30% |
36 years | 24% | 43% | 33% |
37 years | 23% | 41% | 36% |
38 years | 22% | 39% | 39% |
39 years | 21% | 37% | 42% |
40 years | 20% | 35% | 45% |
41 years | 19% | 33% | 48% |
42 years | 18% | 31% | 51% |
43 years | 17% | 29% | 54% |
44 years | 16% | 27% | 57% |
45 years | 15% | 25% | 60% |
46 years | 14% | 23% | 63% |
47 years | 13% | 21% | 66% |
48 years | 12% | 19% | 69% |
49 years | 11% | 17% | 72% |
50 years | 10% | 15% | 75% |
51 years | 9% | 13% | 78% |
52 years | 8% | 11% | 81% |
53 years | 7% | 9% | 84% |
54 years | 6% | 7% | 87% |
55 years | 5% | 5% | 90% |
• Another Life Cycle fund with Alternative asset class with a cap of 5 % can also be introduced.
Note: Comments may be offered vide e-mail on sumeet.kapoor@pfrda.org.in or in hard copy to the below address-
To,
Ms. Sumeet Kaur Kapoor
Pension Fund Regulatory and Development Authority 1st Floor, Chatrapati Shivaji Bhawan
B-14/A, Qutub Institutional Area
New Delhi-110016