Government employees contributing to the National Pension System (NPS) will be allowed to invest a bigger slice of their retirement savings in equities and choose their own pension fund managers. The reform, to be initiated almost a decade after the launch of NPS, can infuse about Rs16,000 crore into India's stock markets.
An employee contributes 10% of the basic salary and the government makes a matching contribution under the NPS. Its investment in equities has been capped at 15% till now, because it has been following the asset allocation rule of the Employees Provident Fund Organisation ( EPFO) that allows to invest up to 15% of its corpus in equities. EPF trustees, however, have chosen to invest nothing at all in equities, thereby depriving India's stock markets the benefit a large pool of long-term savings. The NPS has fixed a higher limit of 50% in equities for voluntary, non-government subscribers. Moreover, only public sector fund managers can manage civil servants' funds now.
Pension Fund Development and Regulatory Authority (PFRDA) had proposed giving government employees the investment choices enjoyed by other individual investors in the NPS and also allowing them to choose their own fund managers.
"The finance ministry has accepted our demand and the decision will come into force once the government issues an order. We will then write to state governments," PFRDA chairman Yogesh Agarwal said. However, civil servants can also continue with the existing arrangement, if they wish to do, he said.
"This is a good initiative, especially since most government employees enrolled in the NPS would be in the age group of 25 to 30 years and can invest a larger proportion of their contribution in equities if they choose to take the risk at initial stages," says Gautam Bhardwaj, managing director, Invest India Micro Pension Services (IIMPS). Those who joined central government service after January 1, 2004 have been mandatorily shifted from the defined benefit scheme to a defined contribution scheme.
The total corpus in the central government and state government NPS was Rs19,333 crore and Rs13,419 crore, respectively on August 7 this year.
About Rs16,000 crore can flow into the stock markets if all central and state government employees invest 50% of their corpus in equities. "Employees need to be better informed to use the NPS effectively and this can be done as part of their induction. They should also have the choice to opt out of the default option - where the investor's age decides the equity exposure," says Bhardwaj.
The NPS delivered average returns of 12.39% for central government employees and 13% for state government employees in 2012-13, outperforming the employees' provident fund and the government's general provident fund. The return from the equity portfolio was only around 8.38% due to the market downturn, but an increase in the yields on government securities and other debt instruments helped.
Eight pension fund managers -- SBI Pension Funds, UTI Retirement Solutions, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, ICICI Prudential Pension Funds Management, HDFC Pension Management and DSP Black-Rock Pension Fund Managers - manage NPS funds for the private sector.
An employee contributes 10% of the basic salary and the government makes a matching contribution under the NPS. Its investment in equities has been capped at 15% till now, because it has been following the asset allocation rule of the Employees Provident Fund Organisation ( EPFO) that allows to invest up to 15% of its corpus in equities. EPF trustees, however, have chosen to invest nothing at all in equities, thereby depriving India's stock markets the benefit a large pool of long-term savings. The NPS has fixed a higher limit of 50% in equities for voluntary, non-government subscribers. Moreover, only public sector fund managers can manage civil servants' funds now.
Pension Fund Development and Regulatory Authority (PFRDA) had proposed giving government employees the investment choices enjoyed by other individual investors in the NPS and also allowing them to choose their own fund managers.
"The finance ministry has accepted our demand and the decision will come into force once the government issues an order. We will then write to state governments," PFRDA chairman Yogesh Agarwal said. However, civil servants can also continue with the existing arrangement, if they wish to do, he said.
"This is a good initiative, especially since most government employees enrolled in the NPS would be in the age group of 25 to 30 years and can invest a larger proportion of their contribution in equities if they choose to take the risk at initial stages," says Gautam Bhardwaj, managing director, Invest India Micro Pension Services (IIMPS). Those who joined central government service after January 1, 2004 have been mandatorily shifted from the defined benefit scheme to a defined contribution scheme.
The total corpus in the central government and state government NPS was Rs19,333 crore and Rs13,419 crore, respectively on August 7 this year.
About Rs16,000 crore can flow into the stock markets if all central and state government employees invest 50% of their corpus in equities. "Employees need to be better informed to use the NPS effectively and this can be done as part of their induction. They should also have the choice to opt out of the default option - where the investor's age decides the equity exposure," says Bhardwaj.
The NPS delivered average returns of 12.39% for central government employees and 13% for state government employees in 2012-13, outperforming the employees' provident fund and the government's general provident fund. The return from the equity portfolio was only around 8.38% due to the market downturn, but an increase in the yields on government securities and other debt instruments helped.
Eight pension fund managers -- SBI Pension Funds, UTI Retirement Solutions, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, ICICI Prudential Pension Funds Management, HDFC Pension Management and DSP Black-Rock Pension Fund Managers - manage NPS funds for the private sector.
Source:-The Economic Times
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