India allows greater flexibility for pension fund investments

India will allow a portion of the country's $80 billion in employee pensions to be invested in a wider array of debt, including short-term bills, in a bid to boost returns and further develop domestic bond markets.

Fund managers handling money on behalf of the Employees' Provident Fund Organisation will also be given more flexibility to invest in corporate bonds, according to new rules from the Labour Ministry marking the first overhaul of investment rules in a decade.

The rules have been posted in the Labour Ministry's website but had not been widely publicised until analysts this week started circulating notes about the changes. The EPFO board would need to approve the changes before they become official.

The EPFO oversees the pensions of around 85 million public and private sector employees across India. It previously allowed fund managers handling its funds to invest only in government bonds and higher-rated corporate debt.

India Life Capital, a private asset manager, said the relaxed rules on investments could increase returns by 10 to 20 percentage points annually.

"The new investment regulation marks a policy break from the past by not just introducing a range of financial instruments to the fund managers of PF (provident fund) trusts, but also letting fund managers decide on strategic asset allocation and ranges," India Life Capital said in a note.

According to the new guidelines, the government will now allow up to 5 per cent of total pension funds to be invested in money markets, including in treasury bills. India also relaxed rules on corporate bond investments, allowing up to 55 per cent of pension funds to be invested in debt issued by companies, banks and state-run financial firms. Previously, the government allowed EPFO money managers to invest up to 30 per cent of funds in debt of only state-run companies.

The government will also allow up to 55 per cent of the pension funds to be invested in a newly merged category comprising government and state bonds. Previously, managers had to deploy 25 per cent of EPFO funds into government bonds and 15 per cent into state bonds. However, India has not yet allowed the EPFO funds to be invested into equities.