New Delhi: The quality of debt securities that your National Pension System (NPS) fund manager buys may see significant improvement from today. The Pension Fund Regulatory and Development Authority (PFRDA) last month revised the guidelines for the valuation of pension schemes, which becomes effective from today (December 1, 2019).
In a circular, the pension fund regulator said that it has made changes in the ‘valuation of debt securities’ as well as ‘valuation policy for securities below investment grade’ in which pension funds in the National Pension System (NPS) can make investments. These guidelines will also bring transparency in valuation.
The PFRDA has said in its circular: “If necessary software development at the Pension Fund and Valuation Agency requires some more time, it should be ensured that guidelines are implemented latest by January 1, 2020.”
Here are key changes in valuation policy guidelines
Valuation of debt securities
Debt securities bought by pension fund managers will be valued without accrued interest. If corporate bonds and debentures are quoted including the accrued interest component on the exchange, the valuation must be done by excluding the accrued interest portion from the quoted price, since the interest is not actually paid and is accounted separately on a daily basis.
The circular says, when new security is purchased for which market price is not available on the same day, then such a security will be valued on the basis of scrip level price (for coupon-bearing securities) /scrip level yield (for discounted securities) at which the securities are purchased.
Valuation policy for securities below investment grade
Earlier fund managers were required to provide a haircut on the valuation of securities that are downgraded to default status. As per the PFRDA circular, “Debt securities which were of BBB investment grade at the time of purchase, but which have fallen below this investment grade, except with default rating (other than Government securities) and securities where credit rating agencies have suspended the ratings but are performing assets as per PFRDA guidelines shall be valued at a discount of 25 percent of the face value.”
All non-investment grade debt securities (other than Government securities) not covered above will be valued at the indicative haircut matrix or price provided by the valuation agency. In case the security is traded where the haircut has been applied, lower of the haircut matrix-based price and trade price will be considered.
Experts say with the new valuation rules the investments under NPS will reflect the realisable value or fair market value of securities.