The Pension Fund Regulatory and Development Authority (PFRDA) just gave more choice to government employees in how they invest in the National Pension System (NPS).

Through a notification dated 31 January 2019, the PFRDA permitted India’s approximately 20 lakh Central government employees to choose their own pension fund manager from among the eight fund managers under NPS. Government employees can also decide the funds they want to invest in and in what percentage, within the conditions laid out under NPS.

As of now, PFRDA has only allowed incremental flows (fresh money) of Central government employees to move between the eight pension fund managers under NPS, but the pension regulator has indicated that norms for shifting the entire accumulated corpus to other managers will be issued in the future.

New choices

PFRDA has made two significant changes for government sector NPS subscribers.

Choice of fund manager: The pension regulator has given government employees the choice of letting any of the eight pension fund managers manage and invest their fresh NPS contributions.

Until now, while private sector subscribers could choose who would manage their NPS corpus from among the eight pension fund managers under NPS, the pension savings of government subscribers was mandatorily split equally between three public sector pension fund managers—SBI Pension Funds Pvt. Ltd, LIC Pension Fund Ltd and UTI Retirement Solutions Ltd.

Currently, the five private sector managers only manage about 3% of the total NPS corpus of about ₹2.8 trillion.

Choice of asset allocation: The PFRDA notification has also given government employees the freedom to choose between four types of asset allocations. A)Existing asset allocation (with equity capped at 15%); B) 100% in Government Bonds; C) Conservative Lifecycle Fund with equity allocation capped at 25%; and D)Moderate Lifecycle Fund with equity allocation capped at 50%. In effect, government subscribers can now increase their equity exposure. Earlier, their contributions were invested only in option A mentioned above, where equity was capped at 15%.

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Kumar Shardindu, CEO of SBI Pension Fund Pvt. Ltd said it was important for government employees to take some equity exposure. “Government employees can only increase their equity allocation by opting for the lifecycle funds. Given that NPS was opened up to government employees who joined service in 2004 and afterwards, the maximum age of these employees would be 45. This means they should definitely look at maximizing equity allocation," he said.

Private sector subscribers can choose options C or D listed above or go for the Aggressive Lifecycle Fund which caps equity allocation at 75%. Alternatively, they can opt for the ‘Active Choice’ option and decide their own split between equities, corporate bonds, government bonds and alternative assets. In Active Choice, the equity allocation is capped at 75% for subscribers below the age of 50. After 50, the equity allocation is tapered off below this level with each succeeding year.

How to choose

While choosing a pension fund manager, note that a single manager will manage equity, corporate bond, government bond as well as alternative asset investments in NPS. This is quite different from mutual funds where one can manage your equity fund and another can look at your debt fund.

So how do you choose a suitable pension fund manager? Shardindu emphasised past returns and returns in different asset classes as the key factors. “The simplest way would be to go on the NPS Trust website and look at the returns that various fund managers have generated over different periods of time. You should also decide what your asset allocation will be and then look at the returns of each of these asset classes in the same proportion as your asset allocation," he said.

For most moderate to aggressive allocations over longer terms in tier-1 accounts, HDFC Pension Fund was the best performing fund manager, but SBI Pension Fund has emerged a front runner in the past year. For conservative allocations, LIC Pension Fund came on top (see graph).

However, historical returns do not differ significantly from each other because of relatively tight investment norms. Suresh Sadagopan, founder, Ladder7 Financial Advisory, said, “Their ranking keeps changing and the difference between different NPS fund managers isn’t very large. That said, past returns would be the primary criteria in picking an NPS fund manager. I advise my clients to only take a call on this once every three years and not keep churning them every year," he said.

Another thing to keep in mind is track record. “The investor should look at the track record of the group across other financial services like mutual funds, banking etc. and how well they have done. Also, post sales service is critical. An all inclusive stable brand with long term return and ease of service should be the pension fund chosen," said Sumit Shukla, CEO of HDFC Pension Fund Ltd.

So choose carefully.

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