Greater Flexibility for Equity Allocation in NPS: A Promising Shift for Subscribers

In a significant move set to benefit subscribers of the National Pension System (NPS), India’s pension fund regulator, the Pension Fund Regulatory and Development Authority (PFRDA), is introducing more flexibility in equity allocation within the NPS framework. This announcement was made by Deepak Mohanty, chairperson of the PFRDA, during the Annual Felicitation Program for Atal Pension Yojana (APY) in New Delhi, as reported by Mint.

Starting in the September quarter, NPS subscribers will have access to a new balanced life-cycle fund. This fund offers an appealing option for those seeking a higher equity allocation in their portfolios. Unlike the existing auto choice funds, where the equity allocation begins to taper off at the age of 35, the new option will delay this tapering until the subscriber reaches 45 years of age. This means subscribers can maintain up to a 50% equity allocation in their portfolios for a longer period, potentially enhancing their returns.

Currently, NPS provides two main choices for subscribers to create their pension portfolios: active and auto. In the active choice, subscribers have the freedom to allocate funds across equity, corporate bonds, and government securities as they see fit. The auto choice, on the other hand, offers three predefined options based on risk preference: aggressive (75% equity), moderate (50% equity), and conservative (25% equity). The equity allocation in these options starts reducing once a subscriber turns 35, with significant tapering by the age of 55.

The introduction of the new balanced life-cycle fund addresses a critical gap in the existing offerings. It caters to subscribers who are willing to take a slightly higher risk for potentially greater returns by maintaining a higher equity exposure for a longer period. This change aligns with the evolving financial landscape and the increasing need for more dynamic retirement planning options.

The numbers speak volumes about the growing popularity and robustness of the NPS. In the fiscal year 2023-24, the PFRDA added 947,000 new subscribers from non-government sectors, leading to a substantial 30.5% year-on-year increase in the NPS’s assets under management (AUM), which now stands at ₹11.73 trillion. As of May 31, 2024, the total NPS subscriber base has reached 180 million.

This move by the PFRDA is a commendable step towards enhancing the flexibility and appeal of the NPS, encouraging more individuals to consider it a viable option for their retirement planning. By allowing for a higher equity allocation until a later age, the NPS is likely to attract a broader spectrum of investors, particularly those seeking to maximize their retirement corpus through a balanced yet dynamic investment approach.

In conclusion, the PFRDA’s initiative to introduce a new balanced life-cycle fund within the NPS framework marks a progressive shift towards greater flexibility and adaptability in retirement planning. This development not only strengthens the NPS’s position as a preferred retirement savings scheme but also reflects a deeper understanding of the diverse needs of today’s investors. As the financial landscape continues to evolve, such forward-thinking measures will be crucial in ensuring that the NPS remains relevant and beneficial for its growing subscriber base.