Barely a week after an expert group led by HDFC chairman Deepak Parekh recommended investment norms for the citizens? pension scheme to be launched on April 1 by the Pension Fund Regulatory Development Authority (PFRDA), the interim regulator has modified the norms and sought public opinion on them by March 2.
The Parekh panel had recommended that citizens create their retirement savings portfolio by deciding their own asset allocation from three sets of approved securities?government (G), equities (E) and corporate bonds (C). Citizens were free to allocate any proportion of their pension savings to these three classes, including allocating 100% to any of the three.
When the panel submitted its report to the PFRDA on February 17, the PFRDA top brass had said that the pattern will be ratified by its Board in a meeting on February 19. However, the board has not only decided to put the proposed pattern up for public scrutiny as is done for several policy proposals, but also presented its own take of the expert group?s views.
?Our job was only to recommend investment norms to the PFRDA. It is the prerogative of the New Pension Scheme Trust and the PFRDA how they want to take the recommendations forward,? Parekh told FE , though he admitted that he hadn?t seen the norms modified by the regulator yet.
The Parekh panel in its report had mooted that workers under 35 have 65% equity exposure which would be cut by 2.5% each year so that equity exposure when a worker reaches 60 is just 10%. But the PFRDA has mooted that the equity exposure for workers under 35 should be just 60%.
The PFRDA has also suggested that the threshold age of 60 should be reduced to 55 years, by when a workers? pension account should have zero exposure to equities, 20% in corporate debt and 80% in government bonds.
In another significant departure from the Parekh panel?s recommendation that equity investments should be routed through the Nifty 50 index fund, the PFRDA has mooted index funds ?that replicate the portfolio of a particular index such as BSE Sensitive Index, NSE 50 index, etc.?
It?s not clear if the PFRDA is implying that pension fund contributions can be invested in small-cap and mid-cap index funds, built on the basis of indices run by the BSE and NSE for such companies. While handing over the report Parekh had said, ?The Nifty 50 is the best option as it is a broad-based stock market index and includes 29 of 30 BSE Sensex scrips.?
?The PFRDA has every right to differ with the expert group?s views. But the norm in such situations is the regulator should ideally consult the expert group for its views on those issues and present a final harmonised report for public views. Presenting its own contradictory confuses stakeholders at one level and also undermines the expertise of the expert group that the PFRDA had set up,? a member of the Parekh committee told FE.
Regulator?s investment norms vis-a-vis Parekh panel?s recommendations
• The Deepak Parekh-led expert group had recommended three sets of asset classes for citizens to choose from? equities (E), government bonds (G) and corporate bonds (C). The PFRDA has retained the asset classes? nomenclature but modified the securities to be included within them
• The Parekh panel suggested equity investment be routed through the Nifty 50 index fund as it is a ?broad-based? stock market index and includes 29 of 30 BSE Sensex scrips. The PFRDA has mooted that index funds ?that replicate the portfolio of a particular index such as BSE Sensitive Index, NSE 50 index, etc
• The Parekh panel mooted that the G category would include government of India bonds, liquid funds and fixed deposits of banks with mandated filters. The PFRDA has modified this category to include only Central and state government bonds
• The Parekh committee categorised investments in state government bonds, PSU bonds, municipal and infrastructure bonds, and corporate bonds of listed firms with a Rs 5,000-crore market capitalisation as ?C?. The PFRDA has decided to include liquid funds and fixed deposits in this category as well as added a new set?securities issued by scheduled commercial banks, public financial institution and corporate bodies with a tenure of at least three years
• For the auto-choice option, where citizens fail to decide on an asset allocation, the Parekh group had mooted a 65% exposure to equities and 25% exposure to corporate debt till the age of 35. The PFRDA has modified equity exposure to 60% and scaled up corporate debt exposure to 30%
• Again, the Parekh panel mooted gradual reduction in the equity and corporate debt exposure with a workers? age, so that exposure to both asset classes is just 10% at the age of 60. The PFRDA has decided that by the age of 55, a workers? pension account should have zero exposure to equities, 20% in corporate debt and 80% in government bonds
