The Pension Fund Regulatory and Development Authority (PFRDA) has announced two key decisions related to debt investments by pension funds. In two separate circulars, the pension regulator has increased the cap on certain debt investments while it also emphasised the significance of proper due diligence by pension funds when it comes to investing in corporate debt securities. Here are the details.
Date with debt
In a circular dated March 25, PFRDA has announced an amendment to the investment guidelines for National Pension System (NPS) scheme. “In order to provide flexibility to the pension funds to improve scheme performance depending on the market conditions, it has been decided to increase the cap on Government Securities and related instruments and short term debt instruments and related instruments by 5% each,” the PFRDA circular says. This will be effective from April 1, 2019.
The asset wise revised caps on the various asset classes have been revised. Now, pension funds have a higher cap of up to 55% when it comes to Government Securities (G-Secs) for composite schemes.
Similarly, debt instruments & related instruments will now have a cap of up to 45%.
Equity and related instruments will have a revised cap of up to 15%.
Asset backed, trust structures will have a revised cap of up to 5%.
Short term debt instruments will have a revised cap of up to 10%.
Here is a look at the changes.
PFRDA in a separate circular has talked at length about investments in corporate bonds. It has emphasised on prudent investment of funds.
“Although the requirement of rating has been maintained in the investment guidelines, however complete reliance on the credit ratings should not be a substitute for a comprehensive investment due diligence,” said the regulator. This is important because ratings have been sharply changed when the ground situation of debt securities have changed. Many fund managers have blamed credit rating agencies for not doing there job. But, PFRDA is indicating that the onus is on pension fund managers.
“A complete documentation of the analysis and assessment and due diligence done along with all backing documents, references and research need to be maintained by the pension funds at all times for scrutiny by the authority or the auditors etc.,” PFRDA said.
PFRDA has warned pension funds managers about overtly relying on a company’s parentage. This is important because many of the so-called good NBFCs with ‘strong parentage’ have also found themselves in problems. Strong parents have not made them insulated to external problems.
“The pension fund manager should not merely rely on the parentage of the company, but rather emphasise on analysis of financial and other parameters. The asset liability management of the issuer company concerned should be an important factor while making the decision to invest,” the regulator said.
It also asked pension fund managers to ensure that in case of a downgrade or default by the debt issuer company, funds must have a robust system of reporting to their respective boards for timely action for recovery of the maximum dues.