The regulatory body overseeing the National Pension System (NPS) and Atal Pension Yojana (APY) -- Pension Fund Regulatory and Development Authority (PFRDA) -- has proposed to introduce the accrual basis valuation for some government securities (G-Secs), moving away from the current full 'mark-to-market' (MTM) system. The purpose of the move is to balance investment prudence with a more stable depiction of pension wealth accumulation for subscribers.
In a consultation paper released on Tuesday, the pension regulator has sought input on the optimal percentage of the G-Sec portfolio that should be valued on an accrual basis, suggesting a range between 10% and 60%. The objective is to keep the difference in Net Asset Values (NAVs) minimal between the schemes valued entirely on MTM and those adopting the proposed dual valuation.
By valuing a portion of G-Secs—which are often held long-term by pension funds—on an accrual basis, the system intends to better reflect the economic purpose of the investments, says PFRDA in its consultation paper.
“This move is ultimately expected to depict a more stable accumulation of pension wealth to subscribers, minimizing the short-term volatility in NAVs caused by market interest rate fluctuations inherent in the pure MTM method,” it stated.
Under the dual valuation model, the G-Sec portfolio would be split into two categories: Held-to-Maturity (HTM) and Available-for-Sale (AFS). The consultation paper asks for criteria to segregate the securities, such as using residual maturity or modified duration, and for rules governing the movement of securities between these two classifications.
Under held-to-maturity, securities are typically valued on an accrual basis, reflecting the intent to hold them until maturity. Under AFS, securities are valued on a mark-to-market basis, reflecting current market prices.
To maintain the integrity of the scheme and manage the implications of the dual valuation, the paper proposes imposing restrictions on fund outflows. These restrictions would specifically target outflows resulting from subscriber choices and switching between schemes, where the dual valuation method is in place.
The paper seeks to establish a specified periodicity for comparing the scheme NAVs calculated using the two different methodologies (full MTM vs. dual valuation). It also asks for the acceptable tolerance limits for the maximum difference in NAVs. Should the difference exceed these limits, the paper mandates the specification of remedial measures, such as recasting unit allocation.
To ensure regulatory, operational, and accounting integrity, the paper emphasizes the need for mandated disclosures on the computation of scheme NAVs when using the dual valuation methodology for G-Sec holdings.
