Pension funds get 30-45 days to rename, merge and restructure schemes as regulator standardises equity exposure, risk levels and investor disclosures

The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a new framework for investment schemes under the National Pension System (NPS), bringing standardised risk categories, common scheme names and tighter limits on the number of schemes that pension funds can offer.

The regulatory changes, announced through two circulars issued on August 28, are designed to make NPS schemes easier for subscribers to understand and compare. Pension funds will now have to align their existing offerings with a common classification based on equity exposure.

The new framework could result in changes to scheme names, restructuring of existing offerings and consolidation of schemes with overlapping mandates. For existing NPS subscribers, however, a change in the scheme name does not automatically mean that they need to switch their investments.

PFRDA Introduces Five Standard Equity Categories

The biggest change is the introduction of five standardised categories for schemes under the Multiple Scheme Framework (MSF).

The categories are based on the proportion of equity that a scheme is permitted to hold.

The objective is to provide subscribers with a common language for understanding equity exposure.

A scheme will no longer be permitted to have an equity mandate that cuts across two different categories. For instance, a scheme cannot have an equity allocation range that spans Category B and Category C.

This will require pension funds to modify certain existing schemes and bring them within a single prescribed category.

Why the New Risk Classification Is Important

NPS offers subscribers multiple investment choices, but differences in scheme names and mandates can make comparison difficult.

Two schemes may appear similar based on their names but could have significantly different equity exposure or investment strategies.

The new framework attempts to address this issue by making equity allocation a more visible part of the scheme structure.

For investors, the category can serve as a starting point when assessing risk. Higher-equity schemes may offer greater potential for long-term capital appreciation but are also likely to experience larger fluctuations during periods of market volatility.

Lower-equity categories may offer comparatively lower market risk but could also have lower long-term growth potential.

The appropriate choice will depend on an investor's age, retirement horizon, financial objectives and ability to tolerate market volatility.

Existing NPS Schemes to Get New Names

PFRDA has also prescribed a standard naming convention for MSF schemes.

The new naming format will include:

• The pension fund's abbreviation

• "NPS"

• The applicable category code

• The scheme name

For Tier II schemes, "Tier 2" will also be included.

Pension funds have been given 30 days from the August 28 circular to rename their existing MSF schemes.

Schemes whose equity mandates currently span multiple categories will also have to be modified, restructured or reclassified within the prescribed period.

As a result, NPS subscribers could see new scheme names on their pension fund or Central Recordkeeping Agency (CRA) platforms in the coming weeks.

Scheme Name Change Does Not Necessarily Mean Investment Change

One important distinction for investors is between a renaming exercise and an actual change in the investment mandate.

If a pension fund changes only the name of a scheme to comply with the new framework, investors should not assume that their investment strategy has automatically changed.

However, if a scheme is being restructured, reclassified or merged, subscribers should examine the revised mandate and understand whether the equity allocation, benchmark, risk profile or investment strategy has changed.

Investors should therefore read official communication from their pension fund before taking any action.

PFRDA Caps the Number of Schemes

The regulator has also placed a limit on the number of MSF schemes that a pension fund can offer within each category.

A pension fund can voluntarily offer up to two schemes under each category for each Tier.

If a pension fund currently operates more than two schemes within the same category, it will have to merge, subsume or otherwise restructure the additional schemes.

Such restructuring will have to be completed within 45 days.

The move is expected to reduce duplication and prevent pension funds from offering several schemes with substantially similar risk and investment characteristics.

Some NPS Schemes Could Be Merged or Closed

The new rules mean that some existing schemes could eventually be consolidated.

Where a scheme is wound up, subscribers will be given an opportunity to move their investments to another eligible scheme.

PFRDA has also specified a default option if a subscriber does not make a choice.

In such a situation, the investment will move to the Life Cycle 50 – Moderate (10E/55Y) Scheme of the same pension fund under Tier I, as prescribed by the regulator.

This makes it important for subscribers to respond to any communication regarding a scheme merger or closure.

NPS Platforms to Provide More Comparable Information

Another important part of the reform is greater standardisation in the way schemes are presented to subscribers.

Investor-facing platforms are expected to make it easier to compare pension funds and schemes using standardised information.

Subscribers should be able to assess factors such as:

• Scheme name

• Pension fund

• Scheme launch date

• Historical returns

• Benchmark returns

• Applicable charges

• Riskometer

• Assets under management

This could make the NPS selection process more transparent, particularly for investors who are choosing between multiple pension funds.

Benchmark Comparison Becomes More Important

The inclusion of benchmark returns in the disclosure framework is particularly relevant for NPS investors.

A scheme's return should not be considered in isolation. Investors should examine whether the scheme has outperformed or underperformed its relevant benchmark over comparable periods.

For example, a scheme generating a 12 per cent return may appear attractive, but if its benchmark delivered 14 per cent during the same period, the scheme has underperformed on a relative basis.

Similarly, a lower absolute return may represent stronger fund-management performance if the benchmark delivered an even lower return.

Investors should therefore consider both absolute and benchmark-relative performance while evaluating NPS schemes.

Riskometer Will Help Investors Identify Volatility

The standardised risk classification is also expected to complement the riskometer displayed for schemes.

This can help subscribers understand that NPS is not a fixed-return investment product when they select market-linked schemes.

A higher equity allocation can result in greater fluctuations in the value of investments, particularly during equity-market corrections.

For younger investors with a long retirement horizon, higher equity exposure may be suitable depending on their individual circumstances. Investors closer to retirement may have different requirements and may prefer a more conservative asset mix.

There is no universally appropriate NPS category for every investor.

What Existing NPS Subscribers Should Check

Existing subscribers do not need to make an immediate investment decision merely because PFRDA has changed the classification framework.

However, they should review their scheme once their pension fund implements the changes.

Investors should check:

1. New scheme name

2. New category

3. Permitted equity allocation

4. Riskometer

5. Benchmark

6. Historical returns

7. Charges

8. Assets under management

9. Whether the scheme is being merged or closed

10. Alternative schemes available, if applicable

If the scheme is only being renamed and the investment mandate remains unchanged, there may be no immediate reason to alter the portfolio.

If the scheme is being merged or wound up, however, investors should evaluate the available alternatives carefully.

Government NPS Accounts Excluded From the New Framework

PFRDA's new classification circular does not apply to accounts tagged to the Government sector.

The changes are primarily relevant to subscribers and pension funds operating under the non-government Multiple Scheme Framework.

Therefore, investors should first identify which NPS sector and scheme framework their account belongs to before interpreting the impact of the new rules.

What Does the Change Mean for Pension Funds?

The new framework will require pension funds to undertake significant operational changes.

They may need to:

• Rename existing schemes

• Reclassify schemes

• Modify equity mandates

• Merge overlapping schemes

• Restructure excess schemes

• Update investor-facing platforms

• Revise disclosures

• Communicate changes to subscribers

The relatively short compliance windows of 30 and 45 days mean pension funds will have to move quickly to align their product portfolios with the revised framework.

Could the New Framework Make NPS More Investor-Friendly?

The standardisation could simplify the NPS ecosystem over time.

Previously, investors could find it difficult to compare schemes when names, investment mandates and equity ranges differed between pension funds.

With standardised categories, an investor can first decide the broad level of equity exposure required and then compare pension funds within that category.

This effectively creates a two-stage decision process:

First: Choose the desired risk and equity category.

Second: Compare pension funds based on returns, benchmark performance, charges, AUM and other relevant factors.

Such a structure could make the NPS investment process easier for new subscribers.

Investors Should Not Chase Returns Alone

Despite greater standardisation, investors should avoid choosing an NPS scheme solely on the basis of its past returns.

Retirement investing is a long-term exercise, and market conditions can change substantially over several years.

A scheme that has performed strongly over one period may not necessarily outperform in the future.

Investors should instead consider their overall asset allocation, investment horizon and retirement requirements while evaluating an NPS option.

Higher equity exposure can potentially enhance long-term returns, but it also increases exposure to market volatility.

Key Takeaways for NPS Subscribers

The latest PFRDA framework primarily seeks to make NPS schemes simpler, more comparable and more transparent.

The major changes include:

• Five standard equity-based categories

• Common naming conventions

• A maximum of two voluntary schemes per category per Tier

• Merger or restructuring requirements for excess schemes

• Standardised disclosure of returns and benchmark performance

• Greater visibility of risk and charges

• A defined process for schemes that are wound up

For existing investors, the immediate priority should be to monitor communications from their pension fund and CRA platform.

A new scheme name alone does not necessarily require action. The more important issue is whether the underlying investment mandate, equity allocation or scheme structure has changed.

Market Outlook

PFRDA's latest NPS reforms could mark an important step towards creating a more standardised and transparent retirement-investment ecosystem in India. By linking schemes more clearly to equity exposure and risk, the framework could make it easier for investors to compare offerings across pension funds.

For subscribers, the impact will become clearer as pension funds begin implementing the changes over the next few weeks. Investors should focus on the revised category, equity allocation, benchmark, charges and risk profile rather than reacting to a change in scheme name alone.

Over the longer term, fewer overlapping schemes and clearer disclosures could improve investor decision-making and strengthen confidence in NPS as a structured retirement-investment avenue.