Let Babus Choose NPS As­set Classes

No jus­ti­fi­ca­tion for any ar­bi­trary al­lo­ca­tion

The Economic Times - - The Edit Page -

The Pen­sion Fund Reg­u­la­tory and De­vel­op­ment Au­thor­ity (PFRDA) re­port­edly would like the Na­tional Pen­sion Sys­tem (NPS) to in­vest 50% of civil ser­vants’ con­tri­bu­tions to their pen­sion cor­pus in equities. Mov­ing away from the present ir­ra­tional al­lo­ca­tion among dif­fer­ent as­set classes is wel­come. How­ever, the reg­u­la­tor must not take in­vest­ment de­ci­sions on be­half of civil ser­vants. In­stead, the choice on the as­set class and the fund man­ager should be thrown open to each civil ser­vant sub­scriber, just as it has been done for a vol­un­tary saver. Right now, there is just one de­fault scheme for civil ser­vice mem­bers of the NPS: up to 50% of the con­tri­bu­tion in gov­ern­ment bonds, up to 45% in other debt in­stru­ments, up to 15% in equities and up to 5% in as­set-backed and trust-struc­tured in­vest­ments. Ab­surdly, the rule is linked to in­vest­ment norms of the Em­ploy­ees’ Prov­i­dent Fund Or­gan­i­sa­tion (EPFO). It must be scrapped. Lee­way in in­vest­ment will al­low, say, a young re­cruit to the civil ser­vice al­lo­cate more of her sav­ings to eq­uity. But a con­ser­va­tive em­ployee may not want to in­vest in stocks. She should have the choice to opt out. A per­son’s risk-tak­ing abil­ity comes down with age, re­duc­ing the ex­po­sure to eq­uity. There is no rea­son why a civil ser­vant can­not have an ‘ac­tive choice’ to de­cide how her pen­sion wealth is to be in­vested across as­set classes. Ap­ply­ing the auto choice for those who do not want to man­age their NPS in­vest­ments makes sense. So, the pro­por­tion of funds in­vested across as­set classes will be de­ter­mined by a pre­de­fined port­fo­lio that varies ac­cord­ing to the age of the sub­scriber. The larger point is to have the same set of in­vest­ment rules for civil ser­vants and vol­un­tary sub­scribers.

The gov­ern­ment should also re­move hur­dles in the path of em­ploy­ees’ vol­un­tary mi­gra­tion from the EPFO to the NPS, which has a bet­ter in­sti­tu­tional struc­ture for su­pe­rior re­turns. En­rol­ment that will en­hance the pool of funds to be man­aged by the NPS and greater flex­i­bil­ity to fund man­agers to in­vest in as­set classes such as pri­vate eq­uity and real es­tate will make the NPS even bet­ter.

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