INDIA: New Pension Scheme Restricts Investment Options

LONDON, England (Global Pensions), February 21, 2008: India’s New Pension Scheme (NPS) will initially allow members just two investment options – government securities alone or a 15/85% split between equities and fixed income, reports Keren Holland from Mumbai. Speaking at the annual Financial Planning Convention in Mumbai, D. Swarup, chairman of the Pension Fund Regulatory and Development Authority ( PFRDA) revealed details of the NPS, which is due to be introduced from 1 June 2008 to cover the 87% of the workforce not covered by a formal retirement scheme. Swarup said the most distinguishing feature of the NPS related to seamless portability across jobs and across locations. He said: “It is a pure defined contribution product with no defined benefit element, returns being totally market related. “NPS will also provide various investment options and choices to individuals to switch over from one investment option to another or from one fund manager to another, subject, of course, to certain regulatory restrictions. “However, to start with there shall be only two investment choices – investment of entire contribution in government securities alone, or adopting the investment guidelines applicable to non-government provident funds.” Under current guidelines up to 15% can be invested in equities and the balance in fixed income instruments. But Swarup said once the PFRDA bill was passed by parliament, the regulator would allow more investment choices – with up to 50% of the pension wealth allowed to be invested in equities. Commenting, Gautam Kakar, retirement benefits consulting business leader, India, at Mercer, said while the NPS was currently only available to government employees, opening it up to private sector participation could provide another investment option for superannuation funds, provident funds, gratuity funds and private savings of individuals. A feature of the NPS is the comparatively lower costs, with an investment management fee of three to five basis points and transaction costs of up to 10 basis points. Kakar said: “With a low [charging] structure NPS provides competitive advantage over insurance schemes.” Rashmi Mehrotra, head of investment consulting, India, Mercer, added the lower costs could encourage more investors into the capital markets. He said: “It should also boost the funds management industry if private players are allowed.” © Incisive Media Ltd. 2008.