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Assets under management (AUMs) under NPS rose over a year earlier by Rs 18,284 crore to reach Rs 48,136 crore as on March 31, a year's growth of 61.2 per cent. , Equity exposure in government sector funds was about eight per cent in the NPS at end-March; these funds accounted for 92.2 per cent of the total AUM of Rs 48,136 crore under NPS at the end of 2013-14. However, over the past six months, fund managers have increased the equity exposure to as much as 13.5-14 per cent, even as the total AUMs keep rising.
Under NPS, schemes like CG and SG for central and state government employees, respectively, as well as NPS Lite and Corporate-CG Scheme (the latter two for non-government employees or the private sector) that have defined investment guidelines have seen equity allocation reach close to its upper limit of 15 per cent. For the remaining AUMs, fund managers are allowed to invest in government securities (G-Secs, up to 55 per cent), debt securities (up to 40 per cent) and money market instruments (up to five per cent).
SBI Pension Fund, UTI Retirement Solution and LIC Pension Fund, the three entities entrusted to manage government sector pension contributions, accounted for Rs 47,854 crore or 99.4 per cent of the total AUM of Rs 48,136 crore managed by pension funds at end-March 2014. The three are permitted to manage government and private sector pension contributions. The five private fund managers, put together, managed only Rs 283 crore, and are permitted to handle only private sector contributions.
Willing but cautious
The fund managers Business Standard spoke to said they were not averse to investing in equities. The seven to nine per cent average exposure to the asset class seen at end-March 2014 versus the 15 per cent permitted, they explained, was due to lack of clarity on the future.
“The market has gone up in the run-up to the elections. Before that, there was no visibility in the market. We took a consensus view that since this is pension money and we have to be very careful, we should not speculate on election results, which can go either way, as that could have impacted the market,” said a fund manager, who didn't want to be identified.
It is similarly so with other fund managers who handle NPS money. “As a policy, we are a bit cautious because it is a pension fund. And, being March, which is the (financial) year-ending period, no fund manager wants to take a chance, as the performance at the end of the year influences allocations for the next financial year. We were also heading for an election. So, for instance, if we are high on equities and if something unfavourable happens, it would impact our equity allocation for the next year,” said another manager at a pension fund, who also wanted to remain unidentified due to company policy.
Another reason for being low on equities (where returns were difficult to predict, then) was that fixed instruments were giving decent returns, even as they barely managed to beat inflation. “We were getting close to nine per cent return on sovereign bonds, which was pretty good. That was one key reason for concentrating on debt. Even if you look at the past three-four years, in India as well as the world over, the economies were not in good shape. The market was moving largely on hopes, rather than fundamentals,” said the first fund manager.
While awaiting better visibility on corporate earnings and the economy, the manager adds that though the new government is in place and provides confidence, "the markets are currently quite high and any increase in equity exposure will only be slowly and consciously”.
Others, however, seem more confident, given that some of them have raised equity exposure to 11-14 per cent for government sector schemes compared to the upper limit of 15 per cent.
Fund managers say they have beaten the benchmark, viz the Nifty, in the current calendar year. With markets near all-time highs and fund managers near their exposure limits, further exposure to equities will be slow. “We would be looking to add weight to equities but on a selective basis,” says a manager.
There is another reason for looking at other asset classes, such as G-Secs. “Currently, we are slightly higher weight on G-Secs, as equities have rallied and G-Secs haven’t. With expectations of rate cuts in 2015, there is potential to make good money in G-Secs. But, let me put it this way, we believe equity will play out as an asset class and so will debt. We have to look for the right opportunity. We remain bullish on both equity and fixed income,” says the second fund manager.
Reasonable, so far
The schemes have delivered decent returns. Central Government (CG, effective from April 1, 2008) has delivered a compounded annual growth rate of 9.1 per cent. State Government (SG; wef June 25, 2009) has given 8.59 per cent. As for the schemes for the private sector, E (Equity) has given 9.2 per cent, G (invests in Government of India and state government bonds) has given 7.93 per cent and C (invests in fixed deposits, debt funds, specific rated paper) has given 10.53 per cent (all with effect from May 2009).
As for the Employees Provident Fund Organisation, the Union finance ministry had allowed it to invest up to five per cent of its funds in equity in 2005 and enhanced the limit to 15 per cent in 2008. However,it has not done any investment in equities. For 2013-14, it has announced an interest rate of 8.75 per cent on pension fund deposits; the rate has been around these levels in recent years.
It is not only the NPS fund managers of government schemes that are taking a higher exposure in equities. Equity-dedicated schemes under NPS are also seeing higher inflow. For instance, Equity Tier-I and Equity Tier-II (Tier-I is mandatory for opening an NPS account, while Tier-II is for voluntary savings), put together, have seen their AUMs rise from Rs 31.3 crore in 2010-11 to Rs 382.1 crore in 2013-14. Tier-I accounted for a little over 90 per cent of the combined AUM (of Tiers I & II) in 2013-14. The key caveat being that the AUMs are still small.
EPFO holdout
These trends are in sharp contrast to that in EPFO. EPFO’s long aversion to equities is also in sharp contrast to the trend in many global markets, where provident fund managers not only take exposure to equities but take this as high as 50-60 per cent of AUMs. Not surprisingly, in terms of pension fund allocation to equities, India ranks 19th among 26 select non-OECD countries (based on 2012 data), shows the 2013-14 annual report of the Pension Fund Regulatory and Development Authority.
The EPFO’s averseness to equities, though, is not without reason. Indian markets have seen sharp swings and up/down cycles since the 1990s, as well as scams that have led to poor returns in many stocks over these years. In fact, some companies now find a place in the history books, while some others have just disappeared, causing huge losses to investors.
While equities are known to be a risky asset class, they also deliver high returns, much more than fixed-income instruments like fixed deposits, government and corporate bonds, etc. More important, the Indian markets have evolved significantly in terms of transparency in trading and company information, regulations and many more areas. These changes and the need to accumulate wealth at a faster rate are perhaps driving NPS fund managers to take calculated exposure to equities. It remains to be seen if EPFO will play catch-up?
