The 43 lakh government employees contributing to the National Pension System (NPS) have a reason to smile. This is because the returns from their NPS plans have been superior to others.
How was this achieved? The government NPS plans need to invest at least 85 per cent of the corpus in gilts, corporate bonds and money market instruments. This higher exposure to debt has proved to be a blessing in the last one year. The Central/State government NPS plans have delivered 8.5-9.5 per cent return in the period. On the other hand, non-government employees who opted for the NPS under the all citizens plan may have made a lower return. This plan allows higher equity exposure — as much as 50 per cent. The pure equity plans have recorded a negative 5-8 per cent return over the past 12 months.
What helped? Bond markets’ gains have trumped those made by the equity market over the past 12 months.
From the beginning of 2015, as inflation came down on plummeting commodity prices, the Reserve Bank of India delivered the first rate cut by January 2015 and followed it up with two in quick succession. This made bond yields, whichhad been moving down since late 2013, fall further. The yield on 10-year government bonds fell from 8.7 per cent in September 2013 to 8 per cent in December 2014 and to 7.5 per cent by October this year. The drop in yields and the rally in bond prices made debt funds’ returns soar.
The government bond funds under NPS have delivered a return of 10.3-10.9 per cent in the last one year. The corporate debt plans posted even higher 11-12 per cent returns.
All employees of the Central/State government contribute 10 per cent of their salary to NPS. Their funds are managed by LIC Pension Fund, SBI Pension Fund and UTI Retirement Solutions. The subscribers currently can’t choose the fund managers or deploy in excess of 15 per cent in equities.
Equity underperformance While the debt market has done well in 2014 and 2015, equities had a bad time.
Slowing global and domestic demand, sluggish investment activity, falling profits and the slow-pace of reforms made stock prices lose the froth they acquired in 2014. Nifty — the benchmark stock index — is down 7 per cent in the last one year.
Equity plans under NPS, which are passively managed, have tracked the returns of the index.
What’s best? PFRDA is now planning to allow Central government employees to deploy up to 50 per cent of their investment in NPS into equities. Is that a good idea?
While pure equity funds have done badly over the past year, it is not the norm. A retirement portfolio should necessarily have a higher equity component as equities have demonstrated double-digit returns over the long term. The best performing equity diversified funds have generated an annualised return of 15-16 per cent in the last 10 years.
