National Pension System set for another round of changes

The National Pension System (NPS), the government-approved pension scheme, is set for another round of changes in terms of investment norms and fund management fees.

The Pension Fund Regulatory and Development Authority (PFRDA) has recently asked private pension fund managers not to invest directly in equities and instead invest in equities only through index mutual fund or exchange-traded funds.

These index funds or ETFs should track either the Bombay Stock Exchange (BSE) Sensex or the National Stock Exchange (NSE) Nifty indices. The fund managers will have to choose the index they want to track in advance on a yearly basis.

Earlier, fund managers could invest in shares of companies which were listed on BSE or NSE and on which derivatives were available or are part of the Sensex or the Nifty indices.

However, fund managers managing government employees' money can continue to invest directly in shares of companies on which derivatives are available on the BSE and the NSE.

NPS portfolio of non-government employees can have a maximum of up to 50% exposure in equities while that of government employees can only have up to 15% exposure.

Sumit Shukla, CEO, HDFC Pension Management, one of the eight pension fund managers which manage private sector money, said the new norms would eliminate the scope of higher-than-the-benchmark returns. "The long-term goal of the regulator is to minimise risk from NPS investment," he said.

Meanwhile, the PFRDA has asked for fresh bid for the selection of pension fund managers. Eight new pension fund managers would be selected based on the lowest fund management fee quoted by them. At present, fund managers can charge a maximum of up to 0.25% as fund management fee. The new bids could change the fund management fees, if the fund managers choose to bid aggressively.

According to a pension fund manager, who refused to be identified, they are already finding it tough to survive at 0.25%; if the new bids results in downward revision of rates, it would be disastrous for the industry. He says ideally the fund management fee should be 0.4-0.5%.