The Pension Funds Regulatory and Development Authority (PFRDA) has released new guidelines on the valuation of securities in which pension funds in the National Pension System (NPS) can invest.
As per the new change, the valuation of the debt security without any market price would be done using more strict and scrip level method than before. The new guidelines will come into effect from 1 December 2019.
Right now, the investable securities for NPS are direct equities and debt securities.
A senior investment executive at a pension fund said that the main change is to shift from matrix-based valuation to individual security-level valuation. “For example, consider the valuation of a debt security that is not traded on a particular day and has no market price. Let’s assume it is rated AA. Earlier this security would be valued according to another security with an AA rating which was actually traded on that day. However, the two issuers may, in reality, be quite different making this quite unrealistic,” he added. “The new guidelines ask valuation agencies to move to security-level valuation which is more accurate,” he said.
The changes also tell that what can be done for the debt securities which are rated below investment grade (BBB) but have not defaulted and are performing assets, as per PFRDA guidelines, pension funds will have to take a 25% haircut.
In case the securities are not meeting the conditions, pension funds will be required to use the indicative matrix or price provided by the valuation agency. Previously, these funds in NPS were hit by different cases of bad debts for ex IL&FS and DHFL groups. Although, the impact was not much.