Corporate India faces a double-whammy from the new investment pattern for non-government retirement funds, effective this fiscal, and the new accounting standard for such funds, AS 15. Returns on corporate India?s self-managed pension, provident and gratuity funds will fall by over 10% in 2009-10 owing to the new investment norms. The income dip will directly hit the bottom lines of companies as AS 15 requires them to fully provide for all accrued retirement liabilities.

Last September, the finance ministry had introduced new ?liberalised? investment norms for non-government retirement funds with the promise of greater flexibility in trading strategies and an option to invest up to 15% of the corpus in equities, expanding the earlier 5% window for stocks. But the norms have actually ended up cramping investment options for most of corporate India?s retirement trusts that have opted to stay away from equity investments.

From April 1 this year, the new investment pattern for non-government retirement funds has sent trustees and admini-

strators of pension funds into a tizzy as its norms are not just restrictive for those that don’t opt for equity investments but also confusing and ?un-implementable? on the ground. Compared to the old pattern, which gave funds a lot of leeway in other investment categories if they chose not to invest 5% in stocks, the new norms leave retirement funds no room to manoeuvre.

The new pattern allows investments up to 55% in central and state government securities, up to 40% in corporate bonds, up to 5% in money market instruments and up to 15% in stocks. But for a trust that doesn?t opt for equities, the ?up to? prefix in the other investment categories (which add up to exactly 100%) is rendered redundant. With no flexibility among investment options and a mandate to adhere to the percentage norms within the year, retirement fund advisors are tearing their hair out.

?Achieving exact percentages for each investment category throughout the year means that trusts must be able to accurately forecast their inflows and outflows. Moreover, with bond denominations in multiples of Rs 10 lakh, it is difficult to get securities in exact proportions,? said Amit Gopal, vice-president, India Life Capital, which advises many domestic and multinational firms on their retirement funds.

?Though the new norms allow for an intra-year deviation of 10% from the prescribed category limits, it?s not clear how that?s to be done. Government securities? ceiling has been raised from 40% to 55%. So can we invest up to 65% intra-year in these bonds or 60.5%?? asked Bhupendra Meel, assistant vice-president at Darashaw, an advisory firm for India Inc?s retirement funds.

Moreover, not opting for equities means trusts are forced to invest 5% of their corpus in money market mutual funds, whose returns had turned negative in recent months. Despite a recovery, returns on money market funds in this fiscal to date remain a paltry 1%-3%. ?Mandatory investment in short-term money market instruments exposes the portfolio to re-investment risk in a falling interest rate scenario,? the advisor pointed out.

?The increased allocation to government bonds and the tight adherence to category limits will bring down returns. Lower returns in defined benefit retirement plans will mean companies will have to fund the gap in earnings,? said Gopal.

A simulation by India Life Capital on the impact of the new pattern, assuming yields that prevailed on March 31, 2009, indicates that returns will drop by at least 10% from last year. But with bond yields and gilt markets seeing much more tumult this year, the actual hit on India Inc?s profit and loss account from this count could be much bigger.

There are other implementation issues hurting companies. The pattern allows pension funds to trade in securities rather than buy and hold them till maturity, with a maximum turnover ratio of 2. At the same time, it explicitly states that securities can only be sold when their rating falls below investment grade. ?If this exit option is exercised, then would such an option exercised be incorporated into the calculation of the turnover ratio?? asked Meel.

Even for the handful of retirement trusts that want to dabble in equities, the norms are vague about whether stocks can be traded and how they should be valued. ?Several of the firms we advise are sitting on cash as they don?t see the point in investing money in losing propositions like money market instruments. We had written to the finance ministry to clarify some of these issues but haven?t heard from it yet. Some of my clients are considering moving their provident fund to the Employees’ Provident Fund Organisation and gratuity funds to insurance players,? said another pension investment advisor to India Inc.