An expert committee headed by G.N. Bajpai has recommended PFRDA to increase the cap on equity exposure of life cycle funds in NPS from 50% to 75%. In September 2014, PFRDA had constituted this committee to review investment guidelines for NPS in private sector.
Life cycle fund is an NPS scheme in which allocation towards equity decreases with the increase in age of subscribers. Typically, such schemes deploy 50% of corpus in equity till the subscriber attains 35 years of age; after which the fund reduces its equity exposure by 2% every year. This exposure comes down to 10% by the time subscriber attains 55 years of age.
The committee has recommended that the pension fund regulator should consider introducing two more variants in life cycle funds – aggressive and conservative life cycle funds.
As the name suggests, aggressive life cycle funds will enable subscribers to get equity exposure of up to 75% of corpus till the subscriber attains 35 years of age. Such an exposure can be reduced to 15% at the age of 55. Similarly, conservative life cycle funds can deploy at least 25% of corpus in equity instruments in the initial years (till 35 years) and can be reduced to 5% at the age of 55.
The committee has said, “On the road to prudent investor regime, the regulator may, in the interim allow introduction of a few new schemes to test the risk appetite of the subscribers and build their confidence in asset classes perceived to be riskier viz. equity through the life cycle fund approach. While the existing life cycle fund shall continue to be the one with maximum investment in equity pegged at 50% (option LC50), more life cycle funds (at least two more to begin with) may be introduced keeping the core principle of decreasing risk appetite with increasing age intact with lower and higher ceilings in equity to cater to both conservative subscriber and subscriber with a higher risk appetite.”
Further, the committee suggested that the current life cycle funds can be revamped by introducing dynamic asset allocation investment style considering the dynamic nature of equity instruments. Simply put, exposure towards equity can be increased when valuations are low and vice versa.
In addition, the committee has recommended that the pension fund regulator should allow pension fund managers to invest at least 5% of NPS corpus in alternative assets.
The pension fund regulator has sought feedback on these recommendations through e-mail at sumeet.kapoor@pfrda.org.in.
