PFRDA Proposes New Rules to Stabilize Pension Returns from Government Bonds
SDG 8: Decent Work and Economic Growth | SDG 16: Peace, Justice and Strong Institutions
Institutions: Ministry of Finance | Ministry of Personnel, Public Grievances and Pensions
The Pension Fund Regulatory and Development Authority (PFRDA) has issued a Consultation Paper proposing to align the valuation guidelines for Government Securities (G-Secs) held by long-term pension funds with their core objective. Currently, long-term investments in G-Secs are often valued using the Mark-to-Market (MTM) method, which subjects the Net Asset Value (NAV) of pension schemes to unnecessary short-term volatility based on daily changes in interest rates.
The core of the proposal is to introduce changes that recognize the βLong-onlyβ nature of pension funds, where investments are intended to be held for decades until the subscriber retires. The PFRDA aims to minimize this daily NAV fluctuation caused by market interest rate shifts, as these G-Secs are typically redeemed at full face value at maturity regardless of interim price movements. The proposed alignment seeks to ensure that the reported NAV more accurately reflects the long-term return for subscribers, thereby reducing unnecessary panic selling and improving subscriber confidence in the pension system.
This move is critical for strengthening the National Pension System (NPS) by directly addressing a key source of volatility and confusion for long-term subscribers. By adopting a valuation approach that reflects the long-term holding period, the PFRDA will increase the reliability of retirement savings projections and encourage greater subscriber participation and retention in long-duration pension products.
What are HTM and MTM valuation methods?β HTM (Held-to-Maturity) is an accounting method where an investment (like a Government Security) is recorded at its original cost and is not re-valued based on daily market price changes. MTM (Mark-to-Market), conversely, requires the securityβs value to be adjusted daily to reflect its current market price. For long-term pension funds, MTM creates artificial volatility in the Net Asset Value (NAV), while HTM provides stable returns.
Follow the full update here: Consultation Paper: Alignment of Valuation Guidelines with the core objectives of Long-only Funds when investing in Government Securities and calculation of Net Asset Value (NAV)