PFRDA revamps NPS scheme framework, introduces five risk-based categories

The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a new framework for investment schemes under the National Pension System (NPS), requiring pension funds to standardise scheme classifications, names and disclosures to make options easier for subscribers to compare.

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Under two circulars issued on August 28, pension fund managers have been asked to rename existing Multiple Scheme Framework (MSF) schemes within 30 days and align schemes with newly defined risk categories. Funds with more than two schemes in the same category will have 45 days to merge, restructure or subsume excess schemes.

The changes may result in scheme name revisions and restructuring across several NPS offerings, although subscribers will not be required to immediately switch their investments.

Five New Risk Categories Introduced

PFRDA has created a standardised classification system based on a scheme's equity exposure, aiming to make risk levels easier for investors to understand.

The new categories are:

• Category A: 80% to 100% equity allocation
• Category B: 60% to 80% equity allocation
• Category C: 35% to 60% equity allocation
• Category D: 10% to 35% equity allocation
• Category E: 0% to 10% equity allocation

Under the revised rules, a scheme cannot have an equity allocation range that spans multiple categories. Each scheme must fit within a single prescribed category.

Scheme Names To Follow Common Format

The regulator has also prescribed a uniform naming convention for NPS schemes. The revised name will include the pension fund's abbreviation, "NPS", the category code and the scheme name. Tier II schemes will additionally carry a "Tier 2" identifier.

As a result, NPS subscribers may notice changes to scheme names on Central Recordkeeping Agency (CRA) and NPS platforms in the coming weeks.

Fewer Schemes Per Category

Pension funds will be allowed to offer a maximum of two schemes within each category for every tier. Where more than two schemes exist in a category, pension funds must consolidate or restructure them within 45 days, according to the regulator.

This could lead to mergers of existing schemes. Subscribers are expected to receive communication from their pension fund if such changes affect their investments.

More Information For Investors

The framework also aims to improve transparency by requiring subscriber-facing platforms to display schemes in a uniform sequence and provide key information before scheme selection.

Information expected to be displayed includes historical returns, benchmark performance, charges, riskometer ratings, launch dates and assets under management.

What Existing Subscribers Should Know

If a scheme is wound up following a merger or restructuring, subscribers will be given an option to select an alternative scheme. If no option is chosen, investments will be moved to the Life Cycle 50 – Moderate (10E/55Y) scheme of the same pension fund under Tier I, according to PFRDA.

The regulator said the changes are intended to make NPS schemes easier to compare and help subscribers make informed investment decisions. The new classification framework does not apply to government-sector NPS accounts