New investment structure is expected to help increase returns of the scheme

The pensions regulator has opened the doors of long term retirement funds to the real estate sector, allowing the pension funds to invest up to 5% of their corpus in Regulated Real Estate Investment Trusts.

A few thousand crores of the National Pension System (NPS) scheme could be invested in the funds-starved real estate sector after the Pension Fund Regulatory and Development Authority (PFRDA) issued the new investment rules earlier this week.

The NPS has a corpus of ` . 86,000 crore. The revised guidelines will also apply to NPS Lite and Atal Pension Yojana.

The government has allowed tax relief for investment up to `. 50,000 in the NPS in the budget for 201516, which will further raise investment corpus of the scheme that al ready receives steady inflow of retirement savings of government employees.

The room for new asset classes has been created by cutting down the allocation for the government securities from 55% to 50%. The new investment structure is expected to help increase returns of the scheme. The new guidelines will apply from June 10. Under the new investment pattern notified by the PFRDA, pension funds can invest up to 50% of their corpus in government securities and related instruments. Up to 45% can be invested in debt and related instruments, including corporate debt and bonds of public financial institutions, up from up to 40% earlier. Up to 5% of the corpus can be invested in money market instruments, same as earlier.

A maximum of 15% of corpus can be invested in equity and related instruments, the limit remaining the same as earlier. The new category of investment notified includes asset-backed, trust structured and miscellaneous investments with a maximum allocation of 5%. The category includes commercial mortgage-based securities or residential mortgage-based securities. It will also include Sebi regulated real estate investment trusts.

Introduction of new asset class is a welcome move which is in line with recommendation of the Bajpai committee report released in April 2015.

It will be interesting to see to what extent the PFRDA amends NPS investment guidelines for private sector.

Incremental inflows into the scheme are to be invested as per this new investment pattern.

Retirement Funds have also been allowed to invest in the tier-1 bonds of the schedule commercial banks, opening another channel for banks to raise capital for expansion. The investment is these bonds is within the 45% limit for Debt Instruments and is subject to further limits within the category.

Extra allocation can also be utilised for investment in bonds of companies in the infrastructure sector including those by the railways, bringing more Long-Term Funds to the sector.