Pension regulator allows 100% equity NPS plans for non-govt subscribers

Introduction

The National Pension System (NPS) in India is a voluntary, defined contribution pension scheme intended to provide old-age income to all citizens (including government employees). It offers flexibility in choosing how one’s contributions are invested — among equities, debts, government securities, etc. Over time, the Pension Fund Regulatory and Development Authority (PFRDA), which regulates NPS, has modified the investment rules to allow higher exposure to equity — especially for non-government (private sector / individual) subscribers. The latest reforms go further, proposing or implementing the option for 100% equity exposure in certain schemes under the NPS.

Background: Previous Limitations

Historically, non-government subscribers under NPS had limits on how much of their investment could be in equity (Asset Class E). Some key past rules:

• Under “Active Choice”, non-government NPS subscribers could invest up to 75% in equities. However, there was an automatic tapering of this equity exposure starting at age 50 (i.e. equity exposure would be reduced gradually above that age, shifting into safer instruments like government securities).
• For Tier II accounts (which are more like voluntary investment accounts linked with NPS, without some of the restrictions of Tier I), earlier PFRDA rules allowed 100% exposure to equities under certain conditions.

These restrictions (especially the tapering rule) were meant to reduce risk as subscribers age and approach retirement, under the assumption that older people should hold more stable, less volatile assets.

Recent Changes: Allowing 100% Equity under Multiple Scheme Framework (MSF)

As per recent regulatory updates:

1. Multiple Scheme Framework (MSF): Starting October 1, PFRDA will allow Pension Fund Managers to design and offer multiple customised schemes, including variants with equity exposure up to 100%. These are targeted especially at non-government subscribers.
2. Under MSF, each scheme will have at least two variants: a moderate risk variant, and a high-risk variant that may allow 100% equity exposure. PFs (Pension Funds) may also introduce low-risk options.
3. Also, under the MSF, other asset classes remain available (e.g. government securities up to 100%, corporate bonds, and alternate assets like REITs, AIFs up to certain caps).
4. For Tier II accounts, previously equity exposure was allowed up to 100% without tapering. The new framework formalises and expands the choice for non-government subscribers.

Rationale / Motivations

Why has PFRDA made this change? Some of the motivations include:

• Greater flexibility and choice: With changing risk profiles, longer life‐expectancy, and more awareness/investor sophistication, some subscribers may prefer higher equity exposure to potentially get higher long-term returns. The reforms allow subscribers to align investment more closely with their preferences.
• Attracting private / non-government subscribers: The private sector, self-employed individuals, gig workers, etc., may be more willing to take equity risk, which can make NPS more attractive to them if such options are offered. The reforms are seen in part as an effort to increase subscriber base in the non-govt segment.
• Product innovation: Allowing PFs to design variants (moderate, high risk, etc.) encourages competition, innovation in scheme design, possibly better performance, and service differentiation.
• Aligning with longer investment horizons: For younger subscribers, investing heavily in equities over a long period has historically yielded higher returns (albeit with more volatility), so permitting 100% equity allows those willing to bear risk to do so.

Implications

The move has far-reaching implications — both positive and cautionary.

Potential Benefits

• Higher expected returns: Equity has in historical Indian markets shown higher returns than debt or government securities over long periods. Subscribers choosing 100% equity could see greater compounding and higher final corpus (if markets perform well, and over long horizon).
• Better matching with risk appetite: Some individuals are more risk tolerant; giving them the option avoids forcing them into more conservative portfolios that may underperform in long term.
• Enhanced competitiveness of NPS: With more flexibility, NPS could become more competitive vs other investment / retirement products which may already offer high equity exposure (mutual funds, etc.).
• Encouragement of financial literacy / awareness: To enable choosing higher equity exposure, subscribers will likely need to understand risks, volatility, etc. This may push for better disclosures, risk profiling, etc. Indeed, PFRDA has indicated preparations for risk-profiling / risk disclosures.

Risks, Challenges, and Limitations

• Volatility risk: Equity markets are volatile; high exposure means higher downside risk. Subscribers may suffer loss in adverse markets, especially nearer to retirement.
• Behavioral risk / poor timing: Not everyone has the expertise or temperament to handle the ups and downs; those who choose high equity may panic during downturns, stop investment, or make wrong moves.
• Lack of diversification: 100% equity means no buffer in debt or government securities; everything depends on market performance.
• Regulatory safeguards needed: To protect subscribers, there must be clear risk disclosures, possibly mandatory risk profiling, transparent fee structures, etc.
• Fee / cost structure concerns: New variants and schemes might come with higher charges. The benefit of higher expected returns must be net of costs. There is a suggestion that under MSF, annual charges may be higher for certain schemes.
• Suitability for different ages: High equity exposure is more suitable for younger subscribers; older subscribers may find it riskier. There is also the question of whether there will still be any tapering automatically (or suitably) for those who choose high equity.

Implementation Details & What Is Known

Some specifics about how these changes will be implemented and what is already decided:

• The MSF is slated to start from October 1, 2025.
• Under MSF, PFs designing new schemes will need prior approval from PFRDA.
• These schemes will offer at least two variants: moderate risk, high risk (100% equity), and possibly low risk.
• Equity exposure up to 100% will be allowed in certain schemes (especially those targeted at non-government subscribers).

What Remains to Be Clarified / Possible Concerns

While the law/regulation seems to allow 100% equity in some cases, there are still areas that need clarity, or which could be risk points:

1. Risk profiling and disclosures: How robust will the risk profiling be? Will it be mandatory for subscribers to opt into high-equity schemes only after passing some risk tolerance assessment?
2. Tapering / exit planning: For someone choosing 100% equity, what happens as they approach retirement (say, 5-10 years left)? Will there be mechanisms or advice to shift to less risky assets? Will there be optional or mandated glide-paths?
3. Fee structure: New schemes may have higher charges. It’s important that costs are transparent, and that high equity schemes don’t burden subscribers with high fees eating into returns.
4. Investor education: Many subscribers may not fully understand equity risk or how to manage portfolios. Misunderstanding could lead to regret or poor outcomes.
5. Market risk and macroeconomic cycles: Given possible shocks (inflation, interest rate changes, global events), 100% equity can be highly volatile. This may harm people who are nearing retirement or have less capacity to absorb losses.
6. Regulatory oversight: Ensuring that PFs design schemes honestly, with good governance; preventing mis‐selling; ensuring that scheme names / risk communications are clear so subscribers know what they are opting into.

Conclusion

The PFRDA’s decision to allow 100% equity exposure under certain NPS schemes for non-government subscribers represents a significant liberalization of investment norms. It reflects a shift toward giving greater choice, recognizing that some investors are willing (and able) to take higher risk for potentially higher long-term returns. The reforms are likely to increase the attractiveness of NPS for younger, private sector, and self-employed individuals, and could lead to greater innovation by Pension Fund Managers.

However, with greater freedom comes greater responsibility — both on the part of regulators and subscribers. The success of this reform will depend heavily on how well risk is communicated, how fees are structured, and how subscribers manage their portfolios, especially as they age or in times of market downturns.