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NEW PENSION SCHEMENEW PENSION SCHEMEFUND MANAGEMENTFUND MANAGEMENT

Arun KaulArun Kaul

GM ( Treasury)GM ( Treasury)

Punjab National BankPunjab National Bank

Fund management IssuesFund management Issues

Investment PatternsInvestment Patterns

Fund Management StrategiesFund Management Strategies

Performance evaluationPerformance evaluation

Regulatory MechanismRegulatory Mechanism

INVESTMENT PATTERNINVESTMENT PATTERN

Present Investment PatternPresent Investment Pattern

(i) Central government bonds 25%(ii) (a) State government bonds, (b) Government guaranteed bonds 15%(iii) (a) Securities of Public Financial Institutions, Public Sector Enterprises, Banks and Infrastructure Development Finance Co., (b) CDs issued by public sector banks 40%(iv) The Board of Trustees may determine investment in any of the above three categories of which max of 10% may be in Pvt Sec Investment Grade Bond 20%

Drawbacks of Present Pattern Drawbacks of Present Pattern

There is a There is a single portfolio optionsingle portfolio option for any investor. He for any investor. He has to invest in the above portfolio irrespective of his has to invest in the above portfolio irrespective of his risk appetite.risk appetite.

The existing portfolio is almost completely invested in The existing portfolio is almost completely invested in Govt. or Govt. linked securities which result in a Govt. or Govt. linked securities which result in a low low rate of returnrate of return

The funds have The funds have no exposure to equitiesno exposure to equities which does which does not give an opportunity to the member to have a higher not give an opportunity to the member to have a higher returnreturn

The funds are completely invested in Indian securities The funds are completely invested in Indian securities thus there is thus there is no scope for diversification of country no scope for diversification of country or political riskor political risk

Proposed Investment PatternProposed Investment Pattern

In the proposed system the investor will have a choice of 6 In the proposed system the investor will have a choice of 6 Pension fund Manager each offering 3 schemes : Safe, Pension fund Manager each offering 3 schemes : Safe, Balanced and GrowthBalanced and Growth

SAFE BALANCEDGROWTHGOVT. PAPER > 50 % > 30 % > 25 %CORPORATE BONDS > 30 % > 30 % > 25 %EQUITY < 10 % < 30 % < 50 % OF WHICH INTL. EQUITY NIL < 10 < 10

Evaluation of Proposed PatternEvaluation of Proposed Pattern

– In Growth Fund an exposure of upto 50 % in equities is In Growth Fund an exposure of upto 50 % in equities is on the higher side.on the higher side.

– Equities expose the fund to possible erosion in the Equities expose the fund to possible erosion in the contribution of the membercontribution of the member

– Fund managers may also be allowed to use Derivatives Fund managers may also be allowed to use Derivatives to reduce market risks and Hedge returnsto reduce market risks and Hedge returns

– Moreover the guidelines may allow the Fund managers Moreover the guidelines may allow the Fund managers to invest in MBS/ABS and REITS ( as and when to invest in MBS/ABS and REITS ( as and when introduced in India) which may offer them a higher introduced in India) which may offer them a higher return while allowing for further diversification in asset return while allowing for further diversification in asset classclass

Framework for Debt InvestmentsFramework for Debt Investments

Investment Grade ratingInvestment Grade rating

Listing at stock exchangesListing at stock exchanges

Analysis of Long Term potential and risk of Analysis of Long Term potential and risk of the industry/ sector the industry/ sector

Framework for Equity Framework for Equity investmentsinvestments

Investments may be restricted to Index Investments may be restricted to Index StocksStocks

Min. requirements of M-cap can be laid Min. requirements of M-cap can be laid downdown

Other determinants such as dividend record, Other determinants such as dividend record, position in the segment, CMP/BV and position in the segment, CMP/BV and trading volumes can be stipulated to restrict trading volumes can be stipulated to restrict the investments to quality stocksthe investments to quality stocks

DisclosuresDisclosures

All the disclosure requirements with respect to All the disclosure requirements with respect to Portfolio Composition, Fees & expenses change Portfolio Composition, Fees & expenses change in investment focus etc. need to be disclosed . in investment focus etc. need to be disclosed . Such guidelines can be evolved on the same Such guidelines can be evolved on the same lines as those applicable to Mutual Funds.lines as those applicable to Mutual Funds.

Basic approach of such disclosures should be Basic approach of such disclosures should be “Principle” based rather than “rule” based with a “Principle” based rather than “rule” based with a view to make available all information relating to view to make available all information relating to the health of the fundthe health of the fund

Suggested Investment PatternSuggested Investment Pattern

SAFE BALANCEDGROWTHGOVT. PAPER > 50 >30 >25CORPORATE BONDS > 30 >30 >35MONEY MARKET > 10 >10 NILEQUITY NIL < 20 < 30 OF WHICH INTL. EQUITY NIL <05 <10

FUND MANAGEMENT FUND MANAGEMENT STRATEGIESSTRATEGIES

Fund Management StrategiesFund Management Strategies

The basic characteristics of the new pension The basic characteristics of the new pension system:system:

Defined contribution rather than defined benefitDefined contribution rather than defined benefit

No assured returnsNo assured returns

Passive management for Equity investmentsPassive management for Equity investments

Fund Management StrategiesFund Management Strategies

ACTIVE FUND MGT. PASSIVE FUND MGT.

Passive Fund ManagementPassive Fund Management

Passive Fund Management has been Passive Fund Management has been prescribed for investment in equities.prescribed for investment in equities.

Such method will definitely keep the Such method will definitely keep the management costs downmanagement costs down

Moreover it will ease the acceptability of Moreover it will ease the acceptability of equities as a part of pension fund portfolio in equities as a part of pension fund portfolio in the initial period the initial period

Active Fund ManagementActive Fund Management

Active fund management may offer better Active fund management may offer better return because of a wider portfolio choicereturn because of a wider portfolio choice

However it may expose the fund to the However it may expose the fund to the relative competency of the fund managerrelative competency of the fund manager

Moreover it may be better to go for passive Moreover it may be better to go for passive fund management for international fund management for international investment until the Indian markets develop a investment until the Indian markets develop a mature understanding of International mature understanding of International markets markets

PERFORMANCE PERFORMANCE EVALUATIONEVALUATION

Benchmarking for G-secs and Benchmarking for G-secs and Corporate bonds Corporate bonds

Since bonds per se represent the decision of risk Since bonds per se represent the decision of risk aversion hence passive management with respect aversion hence passive management with respect to to some defined indexsome defined index should be used such as should be used such as CompBEX.CompBEX.

But for the purpose of providing performance But for the purpose of providing performance measure/ benchmarking to the customer, some measure/ benchmarking to the customer, some hybrid indexhybrid index needs to be developed, which would needs to be developed, which would capture the expected risk and return levels for capture the expected risk and return levels for each investmenteach investment pattern. pattern.

Performance MeasurementPerformance Measurement

If passive fund management is used as the If passive fund management is used as the technique, then a key tool to measure the technique, then a key tool to measure the performance of PFM would be performance of PFM would be tracking errortracking error w.r.t. benchmark hybrid index.w.r.t. benchmark hybrid index.

Moreover the performance of the PFM should Moreover the performance of the PFM should be compared with the respective benchmarks be compared with the respective benchmarks

Such comparisons should be adequately Such comparisons should be adequately disclosed to enable members make a decision disclosed to enable members make a decision regarding continued patronage of a PFMregarding continued patronage of a PFM

REGULATORY MECHANISMREGULATORY MECHANISM

Regulatory IssuesRegulatory Issues

A separate regulator - PFRDA has been A separate regulator - PFRDA has been envisagedenvisaged

However the regulatory issues pertaining to However the regulatory issues pertaining to PFs are similar to Mutual Funds. Therefore a PFs are similar to Mutual Funds. Therefore a separate cell within SEBI can serve the separate cell within SEBI can serve the purposepurpose

This will save the participants from multiple This will save the participants from multiple regulatory jurisdiction and also enable regulatory jurisdiction and also enable integrated regulatory frameworkintegrated regulatory framework

Thank YouThank You