PFRDA favours raising the cap on stock market exposure from 50% to 75% in case of 'active choice' private-sector individual subscribers up to 50 years of age
Making a strong case for taking higher equity risk, the Pension Fund Regulatory and Development Authority (PFRDA) has set in motion the process of raising the cap on stock market exposure from 50% to 75% in case of 'active choice' private-sector individual subscribers up to 50 years of age.
The regulator on February 16 has floated a concept paper on the matter and is awaiting comments from a cross-section of stakeholders till March 18. The higher equity exposure is a double-edged sword because it comes with the potential for generating greater returns but at a greater risk.
Presently, the National Pension System (NPS) private-sector subscribers can allocate their assets across various avenues using two choices i.e., active choice and auto choice.
Under the active choice, the subscriber can allocate the contribution across four asset classes - equity (E), corporate debt (C), government securities (G) and alternate assets (A). The investment in equity is restricted to a maximum 50%. There are 555,798 total numbers of active accounts of all citizen subscribers under tier-I as of 30th December 2017, with their assets under management being over Rs 4,500 crore.
"The cap on equity exposure may be raised to 75% in case of active choice in case of private sector subscribers for individuals up to 50 years. The same shall be gradually tapered off to 50% by 60 years of age. The tapered portion is not to be reinvested by the subscriber in other remaining asset classes (i.e., G, C and A)," the PFRDA said in the latest concept note.
To fortify its stance, the PFRDA drew attention to the 2015 Bajpai Committee report recommendations, the recent lower returns on 10-year G-Sec and how the long-term nature of pensions enables to reap the reward of risk premium and volatility is evened out.
"Considering the fact that though equity provides higher returns, it is subject to volatility. So generally investments in equity are recommended for individuals who have medium to long-term horizon. Accordingly, the individuals who are nearing superannuation may not have enough time period to recoup any adverse volatility in the portfolio. Hence, the cap on the equity may be tapered from the age 50/55 years till it reaches 50% by the age of 60 years," the PFRDA said.
While 'active choice' subscriber have the option to actively decide as to how his/her NPS pension wealth is to be invested, under the 'auto choice' NPS offers an easy option for those participants who do not have the required knowledge to manage their NPS investments.
...& ANALYSIS
- PFRDA favours raising the cap on stock market exposure from 50% to 75% in case of 'active choice' private-sector individual subscribers up to 50 years of age
- The regulator on February 16 has floated a concept paper on the matter and is awaiting comments from a cross-section of stakeholders till March 18
- At present, NPS private-sector subscribers can allocate their assets across various avenues using two choices i.e., active choice and auto choice
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