NEW PENSION SCHEME FUND MANAGEMENT

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NEW PENSION SCHEMEFUND MANAGEMENT

• Arun Kaul
• GM ( Treasury)
• Punjab National Bank

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Fund management Issues

• Investment Patterns
• Fund Management Strategies
• Performance evaluation
• Regulatory Mechanism

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INVESTMENT PATTERN

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Present Investment Pattern
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Drawbacks of Present Pattern

• There is a single portfolio option for any
  investor. He has to invest in the above portfolio
  irrespective of his risk appetite.
• The existing portfolio is almost completely
  invested in Govt. or Govt. linked securities
  which result in a low rate of return
• The funds have no exposure to equities which does
  not give an opportunity to the member to have a
  higher return
• The funds are completely invested in Indian
  securities thus there is no scope for
  diversification of country or political risk

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Proposed Investment Pattern

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

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Evaluation of Proposed Pattern

• In Growth Fund an exposure of upto 50 in
  equities is on the higher side.
• Equities expose the fund to possible erosion in
  the contribution of the member
• Fund managers may also be allowed to use
  Derivatives to reduce market risks and Hedge
  returns
• Moreover the guidelines may allow the Fund
  managers to invest in MBS/ABS and REITS ( as and
  when introduced in India) which may offer them a
  higher return while allowing for further
  diversification in asset class

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Framework for Debt Investments

• Investment Grade rating
• Listing at stock exchanges
• Analysis of Long Term potential and risk of the
  industry/ sector

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Framework for Equity investments

• Investments may be restricted to Index Stocks
• Min. requirements of M-cap can be laid down
• Other determinants such as dividend record,
  position in the segment, CMP/BV and trading
  volumes can be stipulated to restrict the
  investments to quality stocks

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Disclosures

• All the disclosure requirements with respect to
  Portfolio Composition, Fees expenses change in
  investment focus etc. need to be disclosed .
  Such guidelines can be evolved on the same lines
  as those applicable to Mutual Funds.
• Basic approach of such disclosures should be
  Principle based rather than rule based with a
  view to make available all information relating
  to the health of the fund

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Suggested Investment Pattern
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FUND MANAGEMENT STRATEGIES

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Fund Management Strategies

• The basic characteristics of the new pension
  system
• Defined contribution rather than defined benefit
• No assured returns
• Passive management for Equity investments

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Fund Management Strategies
ACTIVE FUND MGT.
PASSIVE FUND MGT.
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Passive Fund Management

• Passive Fund Management has been prescribed for
  investment in equities.
• Such method will definitely keep the management
  costs down
• Moreover it will ease the acceptability of
  equities as a part of pension fund portfolio in
  the initial period

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Active Fund Management

• Active fund management may offer better return
  because of a wider portfolio choice
• However it may expose the fund to the relative
  competency of the fund manager
• Moreover it may be better to go for passive fund
  management for international investment until the
  Indian markets develop a mature understanding of
  International markets

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PERFORMANCE EVALUATION

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Benchmarking for G-secs and Corporate bonds

• Since bonds per se represent the decision of risk
  aversion hence passive management with respect to
  some defined index should be used such as
  CompBEX.
• But for the purpose of providing performance
  measure/ benchmarking to the customer, some
  hybrid index needs to be developed, which would
  capture the expected risk and return levels for
  each investment pattern.

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Performance Measurement

• If passive fund management is used as the
  technique, then a key tool to measure the
  performance of PFM would be tracking error w.r.t.
  benchmark hybrid index.
• Moreover the performance of the PFM should be
  compared with the respective benchmarks
• Such comparisons should be adequately disclosed
  to enable members make a decision regarding
  continued patronage of a PFM

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REGULATORY MECHANISM

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Regulatory Issues

• A separate regulator - PFRDA has been envisaged
• However the regulatory issues pertaining to PFs
  are similar to Mutual Funds. Therefore a separate
  cell within SEBI can serve the purpose
• This will save the participants from multiple
  regulatory jurisdiction and also enable
  integrated regulatory framework

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Thank You