The Bajpai Committee, which was established in September 2014 by Pension Fund Regulatory and Development Authority (PFRDA), the pension regulator, under the chairmanship of G. N. Bajpai, former chairman of LIC and the Sebi, has come up with its recommendations on the National Pension System, or the NPS. These recommendations, if implemented, can drastically change the NPS structure, making it more mutual-fund like.
Here we present to you a broad view of the recommendations made by the Committee.
- Many central government and state government employees already enjoy the benefit of the NPS. For them the maximum equity exposure is 15 per cent. The Bajpai Committee has recommended to make it 50 per cent. For the private sector, under the Auto option of the NPS, the equity allocation is already 50 per cent. By increasing the equity allocation for government employees to 50 per cent the Committee wants to create a level-playing field for both the public and private sectors.
- With reference the point above, the Committee has also recommended taking the equity allocation to 75 per cent in the second phase. In the third phase there would be no ceilings in asset classes. So, NPS subscribers would be able to invest in all asset classes except for the ones which will form a part of the negative list.
- The investment universe is proposed to include the NSE 100 companies, not just the Nifty or Sensex companies.
- Currently the NPS is mandated to invest in equities, bonds and G-secs. The Committee has recommended that the NPS be allowed to invest in other avenues such as private equity, real estate investment trusts (REITs), mortgage-backed securities, commodities and alternative investment funds.
- The Committee has recommended active management of the NPS corpus. Currently, the NPS money is invested in equities through the index ETF route. So, the fund manager typically buys a Sensex or Nifty ETF, which closely tracks the indices. With active management fund managers will have greater freedom to invest in return-yielding stocks.
- Since active management commands higher fees, the Committee has recommended higher fees for managing the NPS money. Also, the Committee wants the fund houses managing subscribers' money to be more accountable towards the returns they generate.
- The Committee recommends that more of the NPS pie be shared with private fund houses. As of now, all NPS contributions from public-sector employees go to government-backed fund houses. Since 90 per cent of the NPS money comes from public-sector employees, a very little money is currently being managed by private-sector NPS funds.
- The Committee has recommended that the subscribers of the NPS be allowed to manage their retirement corpus as per their risk appetite. The recommendations aim to transform directed-investment regime to prudent-investment regime. Under the directed-investment regime, the retirement portfolio was guarded from so-called 'risky' avenues. In the prudent-investment regime the goal is to maximise returns and the investor has the freedom to choose his asset class. The prudent-investment mechanism would be attained in six years.
- The intention of the Committee is quite clear that it wants more professionalism and flexibility in the management of the NPS and better returns for subscribers. What is yet to be seen is how the NPS will stand in comparison to other long-term savings-and-retirement schemes like the PPF and the EPF.