In a move that could augment flow of funds to the nascent alternative investment funds (AIFs) industry, the Pension Fund Regulatory and Development Authority (PFRDA) has allowed private sector subscribers under the National Pension System (NPS) to invest up to 2% of their corpus in the tax efficient AIFs, its chairman Hemant G Contractor said on Wednesday.
The PFRDA-appointed G N Bajpai panel, which submitted its report in May 2015 on review of investment guidelines, had suggested that pension fund managers be given policy flexibility to invest in instruments like Real Estate Investment Trusts (REITS), AIFs and investment trusts within a cap of 5% of corpus for such instruments.
PFRDA has also written to the government to allow government sector subscribers, which constitute nearly 90% of the NPS corpus of Rs 1.1 lakh crore, also to invest in AIFs, Contractor said.
AIF refers to private equity and hedge funds. In the previous Budget, the AIFs were given pass through status under Income Tax Act. AIFs provide another vehicle for facilitating domestic investments, primarily in unlisted securities.
On other recommendations of the Bajpai panel, such as the one to give the option of up to 50% (up from 15%) equity exposure to government employees under the NPS, Contractor said the government will take a call on this. The panel had said that higher equity play and investment in hybrid instruments could help subscribers earn higher returns like their private sector peers. Private sector subscribers are permitted to invest up to 50% in equity instruments.
The NPS assets under management has registered nearly 37% growth to Rs 1.1 lakh crore as on December 31 from Rs 80,855 crore at end-March, 2015. The total number of subscribers under NPS have increased 32% from 8.74 million as on March 31, 2015 to 11.54 million in the current financial year up to February 6.
Contractor said the high growth in NPS in the current fiscal year was aided by the additional `50,000 deduction allowed over and above Rs 1.5 lakh under section 80C of the Income Tax Act. While the compound annual growth rate (CAGR) returns for the government sector under NPS since inception has been around 10%, it was 6.9% in April-December 2015 due to sharp decline in the stock market as well as fall in G-sec rates. Contractor said NPS would continue to generate a CAGR return of over 10% in the long-run and highlighted several steps taken by the regulator increase pension coverage in the country.