Govt employees to enjoy greater say in how their NPS corpus is invested

Younger employees should raise their allocation to equities in this very long-term investment instrument

The Pension Fund Regulatory and Development Authority (PFRDA) recently issued a notification that enhances the choices that central government employees can make in their investments in National Pension System (NPS). While earlier their pension money was invested according to a government-mandated pattern, now the employees will have greater say in how and where their money should be invested.

The first change is that they will have more pension fund managers (PFMs) to choose from. Earlier, central government employees’ money was divided among the three public-sector PFMs: LIC, SBI and UTI. Now, they will also be able to invest their money with one of the private-sector PFMs as well, such as ICICI, HDFC, Kotak, Reliance and Birla. They will be allowed to change their PFM once every year.

Central government employees will also enjoy greater choice in investment pattern. Earlier, all employees’ money was invested as follows: 15 per cent in equities and the balance in debt. Now they will have greater freedom to decide their asset allocation.

A conservative person will have the option to continue with the existing asset allocation described above. Ultra-conservative investors will have the option to invest 100 per cent in government securities. In addition, central government employees have been given two more options that permit enhanced equity exposure. In the conservative life cycle (LC25) fund, they will be able to take maximum equity exposure of up to 25 per cent, and in the moderate life cycle fund (LC50) they will get maximum equity exposure of up to 50 per cent. In both these options, equity exposure will decline as the person moves closer to retirement. Employees will be allowed to change their investment pattern twice every year. 

Even after these changes, however, central government employees do not enjoy the same level of choices as those in the all citizens model (private) of NPS, or in corporate NPS. “Those investors have access to one more life cycle fund called LC75, where the equity exposure can go up to 75 per cent. They also have the active choice option wherein they can choose their own asset allocation. If they want, they can maintain an exposure of 75 per cent in equities up to the age of 50 (it tapers to 50 per cent by 60),” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor.

While earlier the choice was made by the government, now employees will be able to make their own choices. Younger central government employees should seize the opportunity to enhance their equity investment. “Younger employees should go for the LC50 option wherein the equity option can go up to 50 per cent as a higher equity allocation will translate into a bigger retirement corpus,” says Sumit Shukla, chief executive officer, HDFC Pension Fund Management.

In case of government employees, basic constitutes a considerable portion of their salary. The employee contributes 10 per cent of basic while the central government contributes 14 per cent of basic to NPS. In other words, 24 per cent of their basic salary gets invested each month. “The NPS contribution is likely to be a substantial chunk of their monthly savings and investment. Hence it is essential that a considerable portion of it is invested in equities for them to enjoy a comfortable retirement,” says Raghaw.

Since the corpus of central government employees in NPS is considerable—more than Rs 1 lakh crore—a sudden change in asset allocation could impact the markets. Therefore, the legacy corpus will remain invested according to the earlier pattern. Only incremental money will be invested according to the new asset allocation pattern and PFM that the employee chooses.

If you decide to change the fund manager, go with a brand that you trust. “Selecting a PFM based on past returns may not work because the outperformer is likely to change from one year to another,” says Raghaw. If you do wish to select based on outperformance, then go by outperformance in equities. Outperformance in debt usually comes only by courting higher risk, and in any case the differential between the best performer and the rest is not very large.