Monday, November 19, 2012

Changes in NPS (National Pension Scheme)

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National Pension Scheme has been available to all citizens of India for a few years now but has not become very popular, even though it is very cost effective compared to similar investment avenues. To get an overview of the scheme, read this post! To know the performance of various fund managers in NPS, read this post!

The government has introduced few changes in NPS to make the scheme more effective and this post details out those changes.

Increase in Charges: The subscriber will now have to pay a fund management charge of up to 0.25% on the amount invested. Earlier, this charge was just 0.0009%. Since the cost is unsustainable for fund managers and one of the reasons why IDFC Pension Fund Management Co. Ltd has pulled out of NPS after 3 years, the regulator has revised it. The fund managers will also be allowed to participate in the marketing of NPS. In this regard, the fund managers can talk to the distributor belonging to its sponsor group or have a subsidiary.

Fund Managers to have own index funds: According to the investment guidelines of NPS, an investor can invest up to 50% in equity. Fund managers invests these funds in index funds that replicate the portfolio of either BSE Sensex or NSE Nifty. Index funds in turn invest in securities in the same weightage, and in the same proportion, as the index. Due to paucity of funds, fund managers have found it very difficult to have their own index fund and were allowed to invest in index funds of mutual fund companies. For subscriber, it meant an added annual expense of up to 1.5% over the fund management charge of 0.0009%. By increasing the charges and allowing fund managers to market NPS, PFRDA hopes that fund managers will get enough funds to manage their own index funds.

Changes in Fund Managers: At present, there are five fund managers for the private sector: Reliance Capital Pension Fund Ltd, Kotak Mahindra Pension Fund Ltd, UTI Retirement Solutions Ltd, ICICI Prudential Pension Funds Management Co. Ltd and SBI Pension Funds Pvt. Ltd. However, in July, PFRDA opened the doors to more fund managers. Now any financial institution that fits the eligibility criteria can be registered as a fund manager. Even the existing fund managers will need to apply afresh after their three-year contract expires. IDFC Pension Fund Management Co. Ltd, after serving as a fund manager for three years pulled out of NPS last month as the fund was suffering from paucity of funds. In the interim, investors in pension funds of IDFC Pension Fund have been shifted to SBI Pension Funds, but they are free to choose their fund manager. PFRDA has approved DSP BlackRock Investment Managers Ltd as one of the new fund managers.

New Scheme for private companies: For corporate entities wanting to invest in pension funds tailored for government employees, PFRDA has launched a new scheme called the corporate central government scheme (Corporate-CG scheme). The new scheme was launched to bring parity in fund management charges. This scheme will also charge a fund management charge of 0.25% instead of 0.0102% that government pension funds charge currently. Companies can invest in NPS either by choosing private sector NPS or government NPS. Both the schemes have the same architecture and design, but differ in terms of investment pattern. Private NPS currently has three funds—asset class E that invests in equity, asset class C that invests in corporate bonds and asset class G that invests in government bonds. As per the investment norm, an investor is free to choose his asset allocation, but can’t put more than 50% in equities. Companies have the flexibility to choose the fund manager and investment funds for the employees or allow the employees to choose themselves. In case of government NPS, there isn’t much of a choice in asset allocation. Once the company chooses the fund manager, the manager can allocate assets subject to a cap on each asset class—up to 55% in government securities, up to 40% in corporate bonds and up to 15% in equities. Note that while investment in equity in case of private NPS is only through index funds, the government scheme can invest in equity directly or through equity-linked mutual funds. However, this is set to change.
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