National Pension System to be remodelled under Prudent Investor Regime

Published: July 9, 2016 at 8:10 am

Last Updated on

The national pension system (NPS) is likely to be remodelled significantly over the next few years. This is a gradual transition from what is known as a directed investment regime to a prudent investor regime (PIR).

The first phase of the prudent investor regime as recommended by the Bajpai committee is about to be implemented. The Bajpai committee submitted its report on the “Investment Pattern for Insurance and Pension Sector” in May 2012.

What is a prudent investor regime?

The prime objective of a prudent investor regime is consumer protection by offering enough freedom to pension and insurance fund managers to obtain a real return – one that would beat inflation.

The investor/subscriber has

the choice of investment of their pension assets to the subscriber. Based on his/ her perception of risk and financial situation in life, the Subscriber is expected to exercise the choice, as a prudent investor would.  –PFRDA Report

The Bajpai committee report details the historical evolution of how the old prudence was to invest in safe government bonds and the new prudence to invest in a diversified portfolio that balances risk and reward.

It recommends a gradual (over six years) movement from the determined regime to a prudent regime in phases.

It also recommends that insurance and pension fund managers be given the  freedom To invest in a wide variety of domestic and international asset classes

  • Government Securities
  • Corporate Securities (Equities, Bonds)
  • Units issued by Investment Funds (CISs, MFs, VCFs, PEs, etc.)
  • Paper/Demat Commodities, including Metals,
  • Derivatives of Securities/Commodities, including interest rate futures
  • Real Estate Projects
  • Infrastructure Projects.

However, it also suggests various other duties such as building expertise in risk management, fund management, policy formulation, fiduciary duties, accountability.

It notes that all this is possible only when we have a robust, regulated, developed and protected market.

The changes proposed are to implemented in three tiers and the first tier has already begun with some major imminent changes. The full list of changes can be found in the PFRDA report link above (pages 14 and 15).

Phase 1 (highlights)

  1.  Active management in equity (already in place)
  2.  Up to 50% exposure to equity for government employees (current limit for them is only 15%) – to be implemented.
  3. Choice of pension fund managers for government employees (implemented)
  4. Two life cycle funds with max 75% equity for all subscribers (to be implemented)
  5. Allow buying of IPOs
  6. Small amount of exposure to REITs and other “altetrnative investment options”

Phase II – the ceiling on equity will be raised to 75%

Phase III  – the ceiling removed.

In the Guide to investing in the National Pension System (NPS), I have described how NPS asset allocation can be determined by individual, corporate and government subscribers regardless of the proposed modifications.

Active Life cycle choices

Join our 1300+ Facebook Group on Portfolio Management! Losing sleep over the markt crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community

The NPS allows an automatic change in asset allocation as per the age of the subscriber.

This is the current choice for non-government employees

NPS-life-cycle

Notice that the equity allocation starts from its current ceiling of 50% and gradually drops down.

Two alternative active choices are about to be implemented

Conservative life cycle Fund

NPS-conservative-life-cycle

Equity starts at 25% and heads down(!)

Aggressive Life Cycle Fund

NPS-aggressive-life-cycle

Equity allocation starts at 75% and decreases after age 35.

Is it a good idea to gradually change equity allocation with age?

  1. It will lower portfolio volatility for sure.
  2. It may lower returns also – meaning inflation risk may be higher.
  3. It is necessary to lower equity allocation before retirement, but not as early as age 35!!
  4. If the asset allocation changes each year, then the return also changes. This means the amount invested should also increase. This may or may not happen.

Those interested in this option may explore the implications of active change with this tool: Financial Goal Planner with Flexible Asset Allocation.

What I intend to do:

My NPS portfolio is about 45-50% of the total retirement portfolio. The rest is in equity mutual funds.  If I am allowed to change the asset allocation of my NPS (currently 15% equity and majority GOI bonds), I will lower the exposure to gilts and do nothing else. I am more than happy with my NPS performance.

Warning: Do not change equity allocation just because you can! Higher equity exposure does not mean higher returns!!!

Join our 1300+ Facebook Group on Portfolio Management! Do not lose sleep over your bleeding portfolio: Learn how to reduce fear, doubt and uncertainty while investing for financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & its content policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication.Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingThis book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
  

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download) 

Free Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

1 Comment

  1. “Active management in equity (already in place)” – is suicidal so even if the govt removes cap on equity follow the golden rule of 40:30:30

Leave a Reply

Your email address will not be published. Required fields are marked *