THE pension regulator has introduced two new life cycle funds for private sector National Pension System (NPS) subscribers to ensure diversification of assets according to the age and risk profile of subscribers.
In Aggressive Life Cycle Fund, maximum investment in equity is 75% while in the second one, called Conservative Life Cycle Fund, equity exposure has been capped at 25%. The Pension Fund Regulatory and Development Authority (PFRDA) issued a circular last week regarding introduction of these two funds.
The existing one, where maximum investment in equity is 50%, will continue as a default scheme and will be called Moderate Life Cycle Fund. However, for central and state government employees, maximum investment in equity is 15%.
In order to diversify the portfolio of private sector subscribers, PFRDA has created a separate asset called Alternative Investment (Asset Class A) which will consist of commercial/residential mortgage-based securities, units issued by Real Estate Invest Trusts, asset backed securities, units issued by Infrastructure Investment Trusts (all regulated by Securities and Exchange Board of India) and alternative invetsment funds (AIF category 1 & II) registered with the markets regulator. The three existing asset classes are equity, corporate debt and government debt.
The two new life cycle funds have been introduced as per the suggestion of the GN Bajpai committee report on review of investment guidelines for NPS submitted last year. It had suggested a shift away from the fixed income fixated investment pattern and allowing more play to pension fund managers in equity, as a part of the move towards a prudential investor regime.
In Aggressive Life Cycle Fund, a subscriber till age 35 can invest 75% in equity, 10% in corporate debt and 15% in government debt paper. The equity and corporate debt exposure will come down every year, and when the subscriber turns 55, equity investment will be 15%, corporate debt 10% and government debt at 75%.
Similarly, in Conservative Life Cycle Fund equity, corporate and government debt will be 25%, 45% and 30%, respectively, till subscriber’s age is 35 years. Equity and corporate debt exposure will come down every year and it will be 5% for equity, 5% for corporate debt and 90% for government debt when the subscriber turns 55. In the current Moderate Life Cycle Fund, equity allocation up to age 35 is capped at 50%. It falls with increase in age of the subscriber and is 10% when he is 55.
The Bajpai panel had suggested that equity portion should be 100% after a 6-year window. It also pointed out that government employees should be given the same flexibility like private sector. The panel’s
simulation model shows a rejigging of portfolio from 10% equity + 50% government debt + 40% corporate debt to 50% equity + 25% each for corporate and government debt that will increase pension wealth by 46% after three decades.