PFRDA introduces Balanced Life Cycle Fund option

The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a new life cycle scheme, the Balanced Life Cycle Fund for subscribers of the National Pension System (NPS). The Balanced Lifecycle Fund (BLC) is tailored for private sector subscribers to broaden investment options within the NPS, with a focus on those enrolled in the All-Citizen Model and Corporate NPS.

The latest addition to the fund lineup extends the equity exposure period from 35 to 45 years, enhancing the potential for higher equity returns for eligible NPS participants. 

The tapering of equity allocation under the Balanced Life Cycle Fund (BLC) involves gradually reducing the percentage of equity in the fund. This process is comparable to the existing LC50 model, in which the equity is limited to 50%, but with the distinction that the equity tapering in BLC begins at age 45 rather than age 35.

“This new life cycle fund focuses on growth assets, particularly equity investments, providing more flexibility and potential for higher returns for NPS subscribers,” the PFRDA said.

Top points

•  The new investment option is available to private sector subscribers who have invested in NPS either through their employer's corporate model or by investing directly as individuals in the citizens' model.
• The new life cycle fund automatically rebalances asset classes (equity, government securities, and corporate bonds) based on the age and risk profile of the NPS subscriber.
• The Balanced Lifecycle Fund (BLC) focuses on achieving growth through a combination of equity and debt, allowing subscribers to benefit from higher returns while mitigating risks associated with ageing. 
• A key feature of the BLC is its automatic rebalancing of asset classes, simplifying investment management for subscribers. This strategy enables a higher equity exposure during the working years, potentially leading to a larger retirement fund over time.
• With the BLC, equity allocation remains at 50 per cent until the age of 45, as opposed to the existing Moderate Lifecycle Fund (LC-50) where equity tapering starts at age 35. 
• The BLC gradually decreases equity exposure starting at age 45, with equity allocation capped at 35 per cent by age 55. 
• This approach provides a balanced mix of risk and growth in the investment portfolio, promoting financial stability as subscribers approach retirement age.
• The Balanced Life Cycle strategy may allow government employees to embrace some risk within the Unified Pension Scheme (UPS). 
• By opting for this approach, employees may potentially earn higher returns without the guarantee of a fixed pension. Subscribers can receive pensions amounting to 50% of their average pay from the last 12 months of service. Those who choose the default investment option within the UPS will qualify for a guaranteed pension.
• According to the PFRDA circular, “The maximum equity allocation under Balanced Life Cycle Fund shall be 50% which shall taper down after the age of 45 years as compared to 35 years under existing life cycle funds.”

The PFRDA circular confirmed that the current options available under NPS, such as Active and Auto choices, will not be altered. Additionally, the Balanced Lifecycle Fund will be introduced as a new investment choice. The current Moderate Life Cycle Fund (LC50) will remain as the default option, as per PFRDA's statement.

NPS existing structure

With the introduction of the Balanced Lifecycle Fund, subscribers now have four lifecycle fund options to choose from:

1. Conservative Lifecycle Fund (LC-25): Allocates up to 25% to equities.
2. Moderate Lifecycle Fund (LC-50): Allocates up to 50% to equities.
3. Aggressive Lifecycle Fund (LC-75): Allocates up to 75% to equities.
4. Balanced Lifecycle Fund (BLC): A new option that maintains up to 50% equity allocation until age 45.

Lifecycle funds, available through the NPS's 'Auto Choice' investing plan, are asset allocation options that automatically adjust based on the subscriber's age and risk profile each year. These funds have seen increased adoption by private sector customers, with approximately 65% incorporating them into their investment choices. Lifecycle funds are mutual funds that are diversified and automatically shift to a more conservative mix as they approach a specific target date in the future.