Options to Plan your Pension Coming Soon

From April 1, 2009, you will have a choice of investment options to plan for pension. The new pension system (NPS), open to the entire workforce of the country, offer three options, with varying degrees of risks and returns, for you to invest your pension money, including one that will put your entire pension fund in equities if you so desire.
The Deepak Parekh-led panel, set up by the Pension Fund Regulatory and Development Authority (PFRDA) to suggest investment norms for NPS, has recommended a highly flexible investment canvas that will also offer the lowrisk extreme of 100 per cent investment in debt instruments, including central government securities and fixed deposits of scheduled commercial banks.

The panel has suggested three investment choices, christened 'E', 'G' and 'C' options, depending on the risk appetite of the subscriber. Contributors will have the option to decide how much they wish to invest in the three classes with no limits, or what fraction of their investment in any of the asset choices. However, the sum of their active investments must add up to 100 per cent of their contribution.

Ticking on the 'E' option for the entire subscription will mean that the full corpus will be invested in equities among select stocks belonging to the Nifty-50 index.

"We have selected Nifty-50 as it provides one of the most comprehensive list of companies," Parekh, who is also chairman of HDFC, said at a press conference to release the details of the report.

However, pension fund managers (PFMs) will be permitted a larger option of equities outside the Nifty50 stocks as NPS rolls on.

"As we go along, we may increase the number of companies for the fund manager to choose from," Prithvi Haldea, chairman and managing director of Prime Database and a member of the panel, said.

Under the investment guidelines proposed, subscribers will have the option to spread their investments in a pre-determined manner over the three options available. INSTRUMENTS under the 'G' choice provide a high degree of safety. These include all central government securities, liquid funds of Sebi-regulated mutual funds with assets under management (AUM) of at least Rs 5,000 crore in the past six months, all assets that are permitted for investment into liquid funds by Sebi and fixed deposits of scheduled commercial banks.

As per prudential guidelines, funds invested by a PFM in a liquid fund or a fixed deposit should be under 10 per cent of the total 'G' funds held by the manager. The total NPS funds invested in any single AMC has to be under 5 per cent of the total AUM of the AMC.

Under the 'C' choice the instruments available will include, among others, state government bonds, credit rated bonds/ securities public financial institutions, public sector companies and municipal bodies/ infrastructure funds bonds that are rated by a credit rating agency.
For investment by PFM in such bonds, the issuing company has to be listed on a stock exchange, been traded for at least three years and has a market capitalisation of over Rs 5,000 crore as on March 31.

For investors who are unable to make an active choice, the panel has provided an 'auto choice' option where investment will be made in a life-cycle fund. Under this, a portion of subscribers' funds will be invested across the three asset classes determined by a pre-defined portfolio.

At the lowest age entry, the auto choice will start at 65 per cent in 'E' class, 10 per cent in 'G' class and 25 per cent in 'C' class. This will remain fixed for all contributions until the participant reaches the age of 36. From 36 onwards, the weight in 'E' and 'C' asset class will decrease annually and the weight in 'G' class increase till it reaches 10 per cent in 'E', 10 per cent in 'C' and 80 per cent in 'G'.

The PFRDA chairman, D Swarup, said the authority was in talks with the government to alter the taxation norms for pensions so that the entire period of investment, accumulation and payout were tax-exempt. Presently, the last stage of payout is taxable.

Swarup said premature withdrawal would be allowed only for meeting expenditure on critical illness and purchase of one residential house. The minimum age for entering NPS is 18 years, and the maximum 55 years. While the minimum investment by the subscriber has not yet been determined, Swarup said that it would be around Rs 6,000 per annum.

NPS will mainly target the country's huge unorganised sector workforce for participation. However, those in the organised sector who are beneficiaries of other old-age income options such as provident fund can also subscribe to the schemes on offer by PFMs.

Swarup said studies suggested that in the next three to five years, NPS would have 80 million subscribers with AUM reaching $425 billion (Rs 2,12,500 crore) in 15 to 20 years.