<b>Your Money</b>: Central govt staff can now choose fund managers

Employees can opt for equity allocation they want, will need to review their portfolio once a year

Central government employees will soon be able to choose their pension fund manager and decide on their asset allocation within the National Pension System (NPS). At present, their funds are invested in a single scheme (central government plan), where the maximum equity allocation allowed is 15%. This change of rule will mean both greater choice and greater responsibility for government employees.

The current players

At present, there are seven pension fund managers (soon to be nine) in NPS. While all seven provide fund management to ordinary citizens, the public-sector fund managers — Life Insurance Corporation, State Bank of India and UTI — manage the corpus of central government employees separately via a separate plan. The total corpus of these employees is divided equally among them. The money goes automatically to one of the three fund managers, and employees have no say either in the choice of the fund manager or in deciding asset allocation. 

That is set to change now. “Government employees have been wanting greater choice regarding how and where their retirement corpus is invested. The government has agreed to offer them the same choices that it does to ordinary citizens and private-sector employees,” says Sumit Shukla, chief executive officer, HDFC Pension Fund Management. With private players coming in, he expects greater competition to help central government employees earn better returns on their corpus. 

Next, let us turn to how these employees should choose their fund manager. In corporate bond and gilt schemes, fund managers are not allowed to trade and have to hold to maturity the papers they invest in. “In such a scenario, the difference in return can’t be very high. One fund manager may hold a 10-year paper that has a yield of, say, 6.5%, and another may hold a 15-year paper with a yield of 6.9%. In the interim, the latter may appreciate more in a falling interest-rate scenario. But, since trading is not permitted, mark-to-market differences in returns are immaterial in NPS. The difference in returns over the long-term will only be 40 basis points in yield (in this case),” explains Manoj Nagpal, CEO, Outlook Asia Capital. 

When choosing a debt fund, go by the quality of the paper in the portfolio, he suggests.

In equities, the fund manager’s ability to generate alpha should dictate the choice. Active fund management in equities was allowed only over a year ago. “Divergence in fund returns will increase in the future as different fund managers follow different strategies,” says Shukla. 

However, one has to choose all the three funds – equity, corporate bond, and government bond – from the same fund manager. Since the difference in corporate bond funds and gilt funds may not be too high, the track record of the equity fund should basically dictate the choice of the fund manager. 

Employees will also be able to opt for their desired equity allocation. In active choice option, they’ll be able to opt for equity allocation of up to 50%, while in the auto choice life cycle fund, younger employees will be able to opt for an equity allocation of up to 75%. This may potentially help them earn high returns over the long term.

In the future, employees will need to review their NPS portfolio at least once a year and change their fund manager if his performance has been below par. In the active choice option, shift entirely to debt three or five years before retirement.