Let Babus Choose NPS Asset Classes
No justification for any arbitrary allocation
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.