 "Pension regulator might raise NPS equity investment cap for pvt sector")
Investors in the National Pension System (NPS) might see a slew of changes in their investment options. Hemant Contractor, chairman, Pension Fund Regulatory and Development Authority (PFRDA), said in an interview the regulator was considering increasing the equity exposure cap of private sector employees beyond 50 per cent of their corpus.
"Currently, the equity investment cap is 50 per cent for the private sector. The G N Bajpai committee has proposed to increase it further and we are examining it," said Contractor.
On increasing the equity investment limit for government employees, currently at 15 per cent, PFRDA officials said it would depend on the government. The total assets managed under NPS are about Rs 80,000 crore, of which the private sector's contribution is Rs 5,600 crore.
Several other proposals of the Bajpai committee are also under consideration. These include exposure of 10-15 per cent of the investible amount in private equity funds (PEs), venture capital funds (VCs) and alternate investment funds (AIFs). However, sources close to the development said such exotic options might be limited for accounts of high networth individuals (HNIs), who have higher risk appetite.
The Bajpai committee's members include Deepak Satwalekar, former chief executive and managing director at HDFC Standard Life Insurance; S B Mathur, former Life Insurance Corporation chairman; C R Murlidharan, former Insurance Regulatory and Development Authority member; and Madhavi Das, executive director, PFRDA.
"The report has come to us but it needs to be put up before the regulatory board for examination. Only then will we be able to get a sense on what recommendations are likely to be accepted. Rest assured, we hope to complete the examination of the report in two-three weeks and decide whether some money can be invested in PEs and VCs," Contractor said.
In the past, Minister of State for Finance Jayant Sinha has also hinted at this. "We can come up with a cut-off for HNIs that can take higher risk and provide them diversification," he had said at a conference on NPS. Even at the current cap of 50 per cent on investment of private employees' NPS funds in equity, the cumulative investment in equity stands at just 20 per cent. "The numbers for equity investment this year could be better as the stock markets were buoyant," said Contractor.
At present, fund managers mimic Sensex or Nifty, much like exchange-traded funds, when investing in equities. Now, the fund managers could be given additional flexibility by allowing the assets to be invested in high-quality public sector undertakings such as Coal India at a discounted price.
"If these measures become a reality, we will have more room to provide diversification to the assets of NPS. But we will have to wait for the final contours of the regulations," said a fund manager.
NPS, despite its low-cost structure, is at a considerable tax disadvantage compared with the employee provident fund because of its "exempt-exempt-tax" status. This implies that both the lumpsum commuted amount on retirement and annuities will be taxed. Contractor said PFRDA was in touch with the finance ministry to get an "exempt-exempt-exempt" status. "We have been in touch with the finance ministry and have been assured the government wants tax parity for all financial products. What would that entail is yet to be finalised," said Contractor. Increasing the equity portion would help more aggressive investors. "NPS never made sense for discretionary savings as mutual funds and pure equity gives better return in long term. It would be a game changer if it were allowed higher investment into equity and fairness, and clarity on taxation," said Dhirendra Kumar, chief executive mutual fund tracker Value Research.
NPS was introduced in January 2004. Initially, it covered new entrants to central government services (excluding the armed forces) and some state government services. From May 2009, PFRDA extended NPS to all citizens of the country, including those in the unorganised sector.
"Currently, the equity investment cap is 50 per cent for the private sector. The G N Bajpai committee has proposed to increase it further and we are examining it," said Contractor.
On increasing the equity investment limit for government employees, currently at 15 per cent, PFRDA officials said it would depend on the government. The total assets managed under NPS are about Rs 80,000 crore, of which the private sector's contribution is Rs 5,600 crore.
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Several other proposals of the Bajpai committee are also under consideration. These include exposure of 10-15 per cent of the investible amount in private equity funds (PEs), venture capital funds (VCs) and alternate investment funds (AIFs). However, sources close to the development said such exotic options might be limited for accounts of high networth individuals (HNIs), who have higher risk appetite.
The Bajpai committee's members include Deepak Satwalekar, former chief executive and managing director at HDFC Standard Life Insurance; S B Mathur, former Life Insurance Corporation chairman; C R Murlidharan, former Insurance Regulatory and Development Authority member; and Madhavi Das, executive director, PFRDA.
"The report has come to us but it needs to be put up before the regulatory board for examination. Only then will we be able to get a sense on what recommendations are likely to be accepted. Rest assured, we hope to complete the examination of the report in two-three weeks and decide whether some money can be invested in PEs and VCs," Contractor said.
In the past, Minister of State for Finance Jayant Sinha has also hinted at this. "We can come up with a cut-off for HNIs that can take higher risk and provide them diversification," he had said at a conference on NPS. Even at the current cap of 50 per cent on investment of private employees' NPS funds in equity, the cumulative investment in equity stands at just 20 per cent. "The numbers for equity investment this year could be better as the stock markets were buoyant," said Contractor.
At present, fund managers mimic Sensex or Nifty, much like exchange-traded funds, when investing in equities. Now, the fund managers could be given additional flexibility by allowing the assets to be invested in high-quality public sector undertakings such as Coal India at a discounted price.
"If these measures become a reality, we will have more room to provide diversification to the assets of NPS. But we will have to wait for the final contours of the regulations," said a fund manager.
NPS, despite its low-cost structure, is at a considerable tax disadvantage compared with the employee provident fund because of its "exempt-exempt-tax" status. This implies that both the lumpsum commuted amount on retirement and annuities will be taxed. Contractor said PFRDA was in touch with the finance ministry to get an "exempt-exempt-exempt" status. "We have been in touch with the finance ministry and have been assured the government wants tax parity for all financial products. What would that entail is yet to be finalised," said Contractor. Increasing the equity portion would help more aggressive investors. "NPS never made sense for discretionary savings as mutual funds and pure equity gives better return in long term. It would be a game changer if it were allowed higher investment into equity and fairness, and clarity on taxation," said Dhirendra Kumar, chief executive mutual fund tracker Value Research.
NPS was introduced in January 2004. Initially, it covered new entrants to central government services (excluding the armed forces) and some state government services. From May 2009, PFRDA extended NPS to all citizens of the country, including those in the unorganised sector.