Investment Choice under the NPS and Minimum Assured Return Schemes

Choice is one of the defining features of the NPS. Section 20(2) of the PFRDA Act requires that subscribers be offered multiple pension funds and multiple schemes, including a scheme invested wholly in Government securities and minimum assured return schemes. This note explains the asset classes, the active and auto choices, the position of Government employees, and the long development of assured return products.

1. The Statutory Mandate

• Multiple funds and schemes: the subscriber must have a choice of pension funds and schemes (Section 20(2)).
• Safe option: the choice must include a scheme investing up to one hundred per cent in Government securities, for subscribers who want to avoid market and credit risk.
• Assured return option: the subscriber may opt for minimum assured return schemes notified by the Authority.
• No State guarantee: there is no implicit or explicit assurance of benefits except a market-based guarantee mechanism, so any assured return must be priced and paid for within the system.
• Regulation of investment: PFRDA lays down investment guidelines for the corpus under Section 14(2)(b), which every scheme must follow.

2. The Asset Classes

• Scheme E (Equity): invests mainly in listed equity shares, largely of large companies. Highest expected return and highest volatility.
• Scheme C (Corporate debt): invests in bonds and debentures of companies and public sector bodies, and infrastructure debt. Moderate risk, including credit risk.
• Scheme G (Government securities): invests in Central Government securities and State Government loans. No credit risk, but exposed to changes in interest rates.
• Scheme A (Alternative assets): invested in instruments such as REITs, InvITs and alternative investment funds, subject to a small cap. Owing to its small size and the illiquidity of its investments, PFRDA in 2025 decided to merge Scheme A of Tier I into Schemes C and E, giving subscribers a window until 25 December 2025 to move out without charge.

3. Active Choice

• Meaning: the subscriber decides the allocation between the asset classes himself.
• Equity limit: exposure to equity (Scheme E) is capped, at 75 per cent in the standard framework, subject to any age-linked limits PFRDA specifies.
• Debt: Schemes C and G may each be up to 100 per cent.
• Pension fund: the subscriber chooses the pension fund (or, where permitted, more than one) to manage the account.
• Suitability: active choice suits subscribers who understand asset allocation and are willing to review it.

4. Auto Choice (Life Cycle Funds)

Under auto choice, the allocation is set by a life cycle fund, which reduces equity and increases debt as the subscriber ages, according to a matrix specified by PFRDA:

• LC75 (Aggressive): maximum equity of 75 per cent at younger ages, tapering with age.
• LC50 (Moderate): maximum equity of 50 per cent, tapering with age. This is the default for a subscriber who does not choose.
• LC25 (Conservative): maximum equity of 25 per cent, tapering with age.
• Balanced Life Cycle (BLC): a variant of LC50 in which equity remains at a higher level for longer, with tapering starting later.

Auto choice addresses a common behavioural problem: many subscribers do not rebalance their investments as they approach retirement. The life cycle fund does it automatically, reducing the risk that a market fall just before exit will wipe out years of savings.

5. Changing Choices

• Scheme preference: the subscriber may change the asset allocation or switch between active and auto choice up to four times in a financial year.
• Pension fund: the subscriber may change the pension fund once in a financial year.
• Tier II: choices for Tier II are made separately from Tier I.

6. Government Employees

• Default scheme: contributions of Central and State Government employees were originally invested under default schemes managed by public sector pension funds, with a conservative allocation set by Government.
• Choice since 2019: following the decision of the Central Government in 2019, Central Government NPS subscribers may choose their pension fund and may opt for a 100 per cent Government securities scheme or specified life cycle options instead of the default.
• State Governments: may extend similar choice to their employees through their own decisions.

7. Minimum Assured Return Schemes

• Statutory option: Section 20(2) specifically contemplates minimum assured return schemes notified by the Authority. This was a significant point in the parliamentary debate on the Bill, as it responded to concerns about leaving pensions wholly to market risk.
• Market-based guarantee: the guarantee must come from a market-based mechanism, such as capital set aside by the pension fund, with its cost borne within the scheme, not by the Government.
• Development: PFRDA has examined designs for a Minimum Assured Return Scheme at various times. In January 2026, it constituted an expert committee chaired by M.S. Sahoo to develop guidelines and regulations for assured payouts within the NPS, including guarantee structures, pricing, capital requirements and lock-in.
• Assured pension for Government employees: separately, the Unified Pension Scheme gives an assured payout to Central Government employees who opt for it, funded by an additional Government contribution.

8. The Multiple Scheme Framework

From 1 October 2025, non-government subscribers may also invest through schemes designed by pension funds under the Multiple Scheme Framework, which permits several schemes under one PRAN and, in the high-risk variant, equity of up to 100 per cent. The schemes described above continue as the common schemes alongside it.

9. Questions Arising

Is the pension fund liable if a subscriber's chosen scheme performs badly?

No, provided the fund has invested according to the scheme and the investment guidelines. The NPS carries market risk, which the subscriber bears; the Act expressly excludes any implicit assurance of returns. A fund is liable only if it breaches the guidelines, its registration conditions or its duties of care, in which case PFRDA may direct compensation and impose penalties.

Why is LC50 the default and not a Government securities scheme?

A default must suit a subscriber who makes no choice over a working life of several decades. A scheme invested wholly in Government securities is safe but may not keep pace with inflation over such a period. A moderate life cycle fund holds more equity when the subscriber is young and reduces it with age, balancing growth against the need for safety near retirement. The subscriber remains free to choose the Government securities option under Section 20(2).

10. Related Topics and Provisions

• The National Pension System (Section 20)
• The Multiple Scheme Framework
• Investment guidelines for pension funds
• Pension funds and the NPS Trust (Section 23)
• The Unified Pension Scheme