PFRDA Overhauls NPS Rules: Standardized Risk Categories Introduced

The Pension Fund Regulatory and Development Authority (PFRDA) has introduced significant changes to the National Pension System (NPS) investment framework, aiming to simplify scheme comparison and risk assessment for subscribers. These revisions, detailed in two circulars issued on August 28, mandate a comprehensive revamp of existing schemes.

Streamlining Scheme Offerings

Pension funds must now rename their existing Multiple Scheme Framework (MSF) schemes within 30 days. Schemes currently spanning multiple equity categories must also consolidate into a single, clearly defined category.

• Funds offering more than two schemes within the same category must merge, subsume, or restructure these excess schemes.
• This consolidation must be completed within 45 days, ensuring a streamlined portfolio for subscribers.

Understanding New Risk Categories

A central part of the new regulations is a standardized classification system for MSF schemes, designed to clarify risk exposure based on equity allocation. Each scheme must fit exclusively into one of five new equity-based categories.

• Category A: 80-100% equity, designated for aggressive growth with very high risk.
• Category B: 60-80% equity, targeting high growth with high risk.
• Category C: 35-60% equity, offering balanced growth with medium risk.
• Category D: 10-35% equity, considered conservative in its approach.
• Category E: 0-10% equity, primarily debt-oriented with the lowest equity exposure.

Enhanced Transparency and Naming Conventions

PFRDA has also prescribed a common naming convention for MSF schemes, which will improve clarity. This format includes the pension fund’s abbreviation, ‘NPS’, the relevant category code, and the scheme name.

For Tier II schemes, the label ‘Tier 2’ will be appended, making distinctions clear. These naming and scheme modifications are set to appear on NPS and Central Recordkeeping Agency (CRA) platforms in the coming weeks.

Furthermore, the framework demands enhanced transparency in information disclosure on subscriber-facing platforms. Schemes will be displayed in a standard sequence to help investors easily identify the scheme type and category before selection.

• Scheme name and the specific pension fund managing it.
• The launch date of the investment scheme.
• Detailed historical returns and benchmark performance.
• Associated charges for the scheme.
• A clear riskometer indicating risk levels.
• The total assets under management for that scheme.

Subscriber Protections During Scheme Changes

In cases where an MSF scheme is wound up, subscribers will retain the option to transfer their investments to another scheme of their choice. This ensures continuity and subscriber control.

Should a subscriber not make an explicit choice, their investment will automatically default to the Life Cycle 50 – Moderate (10E/55Y) Scheme of the same pension fund under Tier I. PFRDA’s overarching objective is to standardize classification, naming, presentation, and disclosure across the NPS ecosystem, enabling more informed investment decisions.