THE GIST of Editorial for UPSC Exams : 07 MAY 2019 (PFRDA must insist on pension funds to beef up their risk assessment norms (The Hindu)

PFRDA must insist on pension funds to beef up their risk assessment norms (The Hindu)

Mains Paper 4: Governance
Prelims level: PFRDA
Mains level: Welfare schemes

Context

• Mutual funds’ open-ended nature, daily NAV disclosures and significant institutional participation has made sure that their doubtful credit calls cannot escape public scrutiny.
• SEBI has tweaked its regulatory framework for debt mutual funds to ensure prompt disclosure of losses, mark-to-market valuation and a side-pocketing mechanism to ensure that investor interests aren’t compromised when credit calls go awry.
• But there seems to be no such standard operating procedure in place for pension funds, who are significant players in the corporate bond market and manage retirement savings of retail investors.

Indian pension fund regulating framework

• Indian pension fund regulators have traditionally seen no reason to ready their regulatory framework to deal with default events, because these funds are bound by mandate to be quite conservative with their corporate bond exposures.
• PFRDA’s investment guidelines, for instance, specify that the NPS money can only be deployed in government securities or corporate bonds rated AA and above by at least two credit rating agencies.
• But then, a string of recent defaults by AAA or AA-rated entities including IL&FS have shown that high investment-grade credit ratings, in the Indian context, are no guarantee that a corporate borrower will not renege on payments.
• Rating agencies can effect multi-notch downgrades at whim and once defaults or downgrades transpire, market liquidity for such corporate bonds completely dries up.
• Given that the brewing NBFC crisis may unleash more credit events, it is now imperative for PFRDA to rethink its valuation and risk management framework for NPS exposures in corporate bonds.
• There is even a case for barring such exposures in the Atal Pension Yojana, meant for low-income earners.
• The regulator must bear in mind that the NPS, unlike debt mutual funds, offers a very low management fee to AMCs, locks in investors and attracts very little public scrutiny.

Way forward

• Therefore, there need to be clearer deterrents to NPS managers taking on undue credit risks and delaying mark-downs of downgraded bonds.
• NPS investors still can’t exit based on such disclosures, but they can certainly switch assets or managers to reduce risk.
• There has also been a clamour for Indian pension funds to increase their allocations to lower-rated bonds to aid in the development of the bond market.
• But experience so far suggests that relying on third party credit ratings to take such calls is fraught with risk.
• PFRDA should insist on pension fund managers beefing up their in-house credit assessment teams and risk controls, before considering changes in its investment norms.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to the Indian classical dance Kathak, consider the following statements:
1. It is the only classical dance of India having links with Muslim culture.
2. Lucknow Gharana is associated with it.
3. The Vaishnavite tradition of the Bhakti movement had a significant impact on it.

Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 1 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: D

Mains Questions:
Q.1) How the pension funds need tighter investment and valuation norms to deal with defaults? Explain.