India's pension fund executives are expressing reservations about a proposed regulatory framework intended to protect the $175 billion sector from bond market volatility. These managers are concerned that the suggested changes to how certain bond assets are valued could distort the true worth of funds and make investment decisions more difficult for investors.
The core of the issue lies in the potential misrepresentation of fund values due to the new valuation methods. Pension funds worry that the proposed rules might not accurately reflect the real market conditions, leading to skewed perceptions of fund performance. This could create confusion among investors and potentially impact their confidence in the pension system.
Furthermore, the executives anticipate complications in managing their portfolios. The new framework could restrict their flexibility in responding to market changes and optimizing returns for their subscribers. This is particularly concerning at a time when the National Pension System (NPS) is experiencing rapid growth, with Assets Under Management (AUM) reaching ₹15.78 trillion and a goal to expand to 300 million subscribers by 2030.
Pension fund managers are specifically asking the Pension Fund Regulatory and Development Authority (PFRDA) to ease two rules they believe are hurting returns and making it harder to manage money. One key concern revolves around the length of time required to receive returns on corporate bonds with only a single credit rating. Currently, pension funds are generally limited to investing in bonds with two ratings. Many medium-sized manufacturing and infrastructure companies only seek one rating because obtaining a second is more expensive and time-consuming. This restriction potentially shuts pension funds out of viable investments despite stable credit markets and growing demand for funds. The Association of NPS Intermediaries (ANI), which represents pension fund managers, has formally requested these changes from the PFRDA.
Another point of contention is the rule that restricts investments in corporate bonds with less than three years left to mature to no more than 10% of a fund's corporate bond holdings. Managers argue that this rule no longer reflects how credit markets operate and limits their ability to manage risk effectively, especially during periods of market instability. Short-term bonds are generally considered safer and more easily sold. According to ANI, the current limit makes it more difficult to manage cash flow and cover upcoming payouts, as short-term bonds are useful for these purposes in many developed countries. They are not seeking complete removal of the restriction, but rather a revised cap or a tiered system based on asset quality and issuer category.
These discussions with the PFRDA are particularly timely, given recent measures to increase the attractiveness of pension funds. The PFRDA recently broadened investment rules to allow private pension funds to invest in the top 250 stocks by market capitalization listed on Indian exchanges, an expansion from the previous list of 200 stocks approved by the National Pension Scheme trust. Furthermore, investments in gold and silver ETFs are now permitted, offering greater diversification into commodities. These revisions, which took effect immediately, follow earlier changes allowing pension fund houses to offer tailored schemes based on different client risk profiles. The Securities and Exchange Board of India (Sebi) has also proposed changes intended to improve the operational efficiency and flexibility of mutual funds, including allowing them to act as points of presence for pension funds and distribute funds globally under certain conditions.
