In a major step to make the National Pension System (NPS) more attractive to private-sector employees and gig workers, the Pension Fund Regulatory and Development Authority (PFRDA) has introduced sweeping reforms.
Starting October 1, pension fund managers (PFs) will be allowed to design and offer multiple customised schemes, with equity exposure permitted up to 100%.
This move represents a sharp shift from the current system, where subscribers could only choose one scheme with pre-set allocations and a maximum of 75% equity exposure. The new Multiple Scheme Framework (MSF) allows fund managers to create offerings tailored to different categories of workers, such as corporate employees, self-employed professionals, and digital economy participants. Each scheme will have at least two variants-a moderate option and a high-risk option with full equity exposure. PFs may also offer low-risk variants if they choose.
Higher flexibility
The flexibility comes at a price. Under MSF, annual charges are capped at 0.3% of Assets Under Management (AUM)-much higher than the current 0.03%-0.09% range. PFs attracting more than 80% new subscribers to a scheme can also levy an extra 0.1% incentive fee. According to PFRDA, these costs are justified given the scope for innovation, diversification, and subscriber choice.
The framework links schemes to a subscriber’s PAN identity, enabling multiple investments under a single umbrella. This change removes constraints on diversification and allows individuals to align investments more closely with retirement and wealth-building goals.
Opportunities for pension funds
For PFs, the reforms create room for product innovation and market expansion. Within PFRDA norms, they can now design schemes across asset classes such as equity (up to 100%), government securities (up to 100%), corporate bonds (up to 100%), and alternative assets (up to 5%) like REITs and AIFs. Every new scheme will require prior approval from PFRDA to ensure compliance.
Funds and diversification
Interestingly, one of the fastest-growing asset classes in NPS-Alternative Investment Funds (AIFs), also known as Scheme A in Tier-I accounts, has already demonstrated the potential of diversification. Over the past year, AIFs have delivered up to 25% returns, significantly outperforming broader equity indices.
Offered by all 10 NPS pension fund managers, Scheme A invests in REITs, InvITs, Additional Tier-1 (AT1) bonds, and securitised instruments. UTI Pension and Tata Pension Funds, which allocated higher exposure to top performers like Mindspace REIT and IndiGrid InvIT, led the returns chart.
However, these returns come with restrictions and risks. Scheme A is only available to Tier-I investors, and exposure is capped at 5% of the corpus under the active choice option. Its heavy allocations to AT1 bonds, REITs, and InvITs make it vulnerable to volatility. AT1 bonds, for example, can suspend coupon payments or be written off entirely in times of crisis-as seen in Yes Bank’s 2020 collapse. Similarly, while REITs and InvITs provide exposure to steady real estate and infrastructure cash flows, they remain cyclical and sensitive to interest rate movements.
Non-government participation
Despite such risks, NPS participation in the private sector is growing strongly. As of FY25, total AUM under NPS rose 23% year-on-year to Rs 14.4 lakh crore, with non-government subscribers contributing Rs 2.91 lakh crore, up 29% from last year. Since its inception, NPS has delivered average returns of 9.3%, highlighting its consistency.
By combining broader equity choices, innovative schemes like AIFs, and tax efficiency, the new framework is expected to make NPS a far more flexible, competitive, and investor-friendly retirement savings tool for India’s evolving workforce.