India’s pension regulator, the Pension Fund Regulatory and Development Authority (PFRDA), has written to the government seeking approval to invest 50 per cent of the funds contributed by government employees under the National Pension Scheme (NPS), its flagship scheme in stocks. This signals a major shift considering that only 15 per cent of such funds are now routed to the stock markets.
The NPS now has a corpus of Rs 198,000 crore with 87 per cent — Rs 172,260 crore — being contributed by government employees. Pension funds regulated by PFRDA would be able to invest over Rs 86,000 crore in the Indian stock market if the government approves the proposal. That’s an additional Rs 57,000 crore for stocks. Currently, PFRDA can invest only 15 per cent (close to Rs 29,000 crore) of the corpus of funds contributed by government employees in the stock market.
NPS is an alternate option for those looking at retirement savings compared to the Employees’ Provident Fund (EPF) for the organised sector which is controlled by the Employees Provident Fund Organisation (EPFO) of the government.
The EPFO, which has a corpus of close to Rs 10 lakh crore, decided last month to pump in Rs 22,500 crore in exchange traded funds in 2017-18 following approval from its central board of trustees to increase the equity investment from 10 per cent to 15 per cent.
According to PFRDA chairman Hemant Contractor, close to 13-14 per cent of NPS funds are invested in the equity market.
“We are planning to increase it. We have put up a proposal to the government to increase it to 50 per cent. In the case of government servants, the equity investment is limited to 15 per cent whereas in the case of non-government employees it can go up to as high as 50 per cent. It should be uniform for all,” Contractor told The Indian Express.
“We have said government servants should be given the same choice. If that happens, it will be a big change. Government money still accounts for 87 per cent of the total funds. That could make a lot of difference. In the long-term, it has shown that equity is the better investment in terms of returns,” Contractor said.
Under the NPS, administered and regulated by the PFRDA, individual savings are pooled in a pension fund which is invested by PFRDA-regulated professional fund managers according to the approved investment guidelines in diversified portfolios comprising government bonds, bills, corporate debentures and shares. These contributions grow and accumulate over the years, depending on the returns earned on the investment made.
On the returns on investment under NPS, Contractor said, “For the last eight years, we have given a return of over 10 per cent. Last year, on the equity investment, we generated a return of 18 per cent, around 12 per cent for corporate bonds and less than on government securities. Returns are as good as what you can get in the market.”
However, in a changing interest rate scenario, returns can also come down. “The general trend is that interest rates will come down. These will come down. It will be within the range of the market,” he said.
In December 2016, the EPFO had reduced interest rate on provident fund deposits to 8.65 per cent for 2016-17 from the current 8.8 per cent for its 17 crore subscribers.
The PFRDA chief said the growth this year has been as good as last year. “Last year the subscriber grew by around 27 per cent. We are maintaining that pace of growth in the number of subscribers. Investments also grew by around 47 per cent last year. This year also we are averaging around the same growth. The amount that we have under investment is just under Rs two lakh crore — that’s Rs 198,000 crore. The number of subscribers is around 16.7 million now,” he said.
According to him, the growth in number of subscribers in the government sector is around 11-12 per cent, which is less than the average that the PFRDA has clocked. “The growth in government subscribers depends on the retirement that’s taking place and replacements,” he said.