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Passive Management For Pension Funds

PFRDA has effected some far-reaching changes in the way funds will be handled

After an Expert Group, chaired by Deepak Parekh, came up with pension funds investment norms in February, the Pension Fund Regulatory and Development Authority (PFRDA) wanted some modifications to be carried out.

It invited suggestions, on its website, from the public and stakeholders. Taking the popular view it has now finalized these investment norms before going public on May 1, 2009.

There are three major changes that PFRDA has mulled in the recent revision.

1. The allocation in equity investment in the life cycle plan has been revised down from 65 per cent to 50 per cent. i.e. if at the age of 35 years one opts for life cycle plan then 50 per cent would go in equity or asset class E, 20 per cent in asset G or government bonds and 30 per cent in asset class C or corporate debt, compared to earlier allocation plan of 65 per cent, 10 per cent and 25 per cent respectively. After 20 years of rebalancing, at 55 years the asset allocation would become 10 per cent in asset E, 80 per cent in G and 10 per cent in C.

2. Investment in equity will now be only through index funds replicating either BSE Sensex or S&P CNX Nifty. Earlier it was recommended that investment in equity will only be limited to just Nifty stocks but fund managers would have the freedom to choose the weightage. This means that the funds would now be passively managed rather than the earlier actively management proposal. The implication of this is that now there won’t be any differentiating factor among the six different fund managers that PFRDA have appointed. Which raises the question what was need of appointing so many of them?

3. Lastly PFRDA has included corporate papers in the asset class C which were not among the eligible investment instrument.

Rest of the changes are minor and are nothing but mere reclassifications like investment in liquid funds of fund houses is now included in asset class C not with asset G as it was earlier recommended by Expert Group. Fund mangers now will be able to invest in State government bonds in asset class G not in asset class C.

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