PFRDA Introduces Risk Profiling Framework for NPS Schemes
To enhance transparency and improve decision-making for subscribers, the Pension Fund Regulatory and Development Authority (PFRDA) has mandated a new risk profiling framework for schemes managed by Pension Funds (PFs) under the National Pension System (NPS). This initiative is designed to help investors better understand the risk associated with different asset classes and schemes, ensuring informed selection based on individual risk appetite.
Scope and Applicability
The circular applies to all NPS schemes, both Tier I and Tier II, managed across the following asset classes:
- Equity (E)
- Corporate Debt (C)
- Government Securities (G)
- Alternative Assets (A)
Pension Funds are required to conduct and disclose risk profiling for each scheme on a quarterly basis, and also provide a summary on an annual basis.
Risk Classification Categories
Each scheme will be classified into one of six risk levels:
- Low
- Low to Moderate
- Moderate
- Moderately High
- High
- Very High
These risk levels are based on a composite risk score derived from a quantitative assessment of asset composition, market exposure, and liquidity.
Methodology for Risk Scoring
Debt Instruments (C and G Classes):
Risk is determined based on:
- Credit Risk (credit rating of instruments)
- Interest Rate Risk (Macaulay duration)
- Liquidity Risk (listing status, credit quality, and structure)
Each component is scored, and the final risk score is the average of all three.
Equity Instruments (E Class):
Risk scoring is based on:
- Market Capitalization (large-cap, mid-cap, small-cap)
- Volatility (price fluctuations)
- Impact Cost (as a proxy for liquidity)
Scores are weighted by the asset’s share in the total portfolio.
Other Instruments:
- Mutual Funds: Risk score based on their published “risk-o-meter” values.
- REITs/InvITs: Assigned a risk score of 7.
- AIFs: Assigned a risk score of 8.
- Cash/NCA: Assigned a risk score of 1.
Disclosure Requirements
PFs must:
- Publish risk profiles on their websites under the “Portfolio Disclosure” section within 15 days of each quarter-end.
- Submit the same to the NPS Trust for publication on its website.
- Annually disclose the number of times a scheme’s risk level has changed, and the risk classification as of March 31, including it in the Annual Report and Abridged Summary.
Implementation and Legal Basis
The new framework comes into effect from July 15, 2022, although Pension Funds may voluntarily adopt it earlier. The circular is issued under Sections 14(2)(b) and 23 of the PFRDA Act, 2013, and Regulation 14(1) of the PFRDA (Pension Fund) Regulations, 2015.
Conclusion
This move by PFRDA ensures that NPS subscribers have better visibility into the risk associated with their pension investments. By introducing a structured and transparent risk profiling system, the regulator aims to strengthen investor protection, improve comparability across schemes, and support better retirement planning.
