NPS investment update: Scheme A merging with C and E – What Tier | subscribe should know

1) What is this update?

It seems that PFRDA (the regulator of NPS) has proposed/announced the merger of the Scheme A (Alternative Assets) option of the NPS Tier I (Active Choice) into Scheme C (Corporate Bonds) and Scheme E (Equity) of the NPS. This is to ensure the subscribers’ money is pooled in larger and more diversified investment pools.

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So in practice:

As your allocation to Tier I accounts involved Asset Class / Scheme “A,” that “A” portion will not proceed in the same manner going forward.

The “A” you will be transitioning/absorbed into C and E (followed by a possible realignment of your current allocations).
This notification is specifically sent to subscribers who had opted for Scheme “A” in Tier I under Active Choice.

2) First, know what “Tier” means in NPS (Tier I vs Tier II)

This confuses many users because “Tier” is not an asset class, but rather the type of NPS account.

Tier I (Main Retirement Account)

This is the core pension/retirement account.

Covers withdrawal/exit rules and conditions (intended for discipline of retirement).

Confer key tax advantages under the Income Tax Act (provided that certain conditions have been met).

Tier II (Voluntary Savings Account)

It is rather like the flexible investment account that is tied to your PRAN.

Normally easier liquidity than Tier I, but taxation treatment varies by type and variant.

Not the primary pension lock-in account.

Important: The Scheme A merger notification is centered on Tier I subscribers (principally Active Choice subscribers).

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3) What are the schemes / asset classes A, C, E (and G)?

In the “Common Schemes” under the NPS, your investments are diversified across various asset classes. The common names that you normally see are:

E = Equity (Stocks/Equity Related Instruments)

C = Corporate Debt (corporate bonds/debt instruments)

G = Government Securities (G-Secs and Government Guaranteed Securities)

A = Alternative Assets (separate bucket for limited exposure to alternative-type instruments)

The Economic Times’ explainer continues the list of NPS common schemes investment choices with the following:
The Economic Times

The master circular regarding the guidelines of investments specifies what qualifies under G and C categories (government securities vs. corporate debt instruments, etc.).

What was “Scheme A” intended to achieve?

“Scheme A” referred to the bucket for Alternative Assets. It was the smaller component of the NPS system and not the mainstream allocation system as in E/C/G. News articles discussing the notice from the regulator introduced it as a scheme with a relatively smaller corpus and limited invest options, while some of the underlying assets could have lock-in terms.

4) Who is affected in this Scheme A Merger?

You may also be affected if all these apply to you:

“You have NPS Tier I,”

You chose Active Choice, and

Your allocation consists of Scheme / Asset Class “A” (including even a small percentage).

If you always chose Scheme A, or you choose only Tier II, or you are in a different structure/model where A was never selected – then this may not affect you.
“The PFRDA Note clearly mentions: “Those NPS Subscribers who had opted for Scheme A in Tier I (Active Choice)””.

5) Why is PFRDA doing this? (The regulator’s reasons)
“PFRDA’s letter contains four overarching themes regarding the amalgamation of Scheme ‘A’ into Schemes ‘C’ & ‘E’:
“

Diversification & Stability

The corpus in Scheme A was limited, and there were limited places to invest.

When merged, your funds will be combined with other people’s, resulting in diversified pools of funds at C&E, which could therefore reduce “concentration risk.”
Public Fund Record Document

Enhanced risk-adjusted returns
More extensive plans can offer optimal portfolio management efficiencies and optimal risk-reward profiles for pension savings.

Increased liquidity or withdrawing and transferring funds easily
Some assets in Scheme A have the potential for long lock-in periods.

After the merger, the investment pattern changes to more liquidity-oriented schemes. This kind of initiative makes it easier for customers to switch.

Compliant with market best practices
The letter talks about the continuing reforms, SEBI changes, and simplified asset class reforms, and states that this amalgamation harmonizes NPS with best practices.

Therefore, the “big picture” argument being canvassed by the regulator is: “scheme A was too small/limited in scope and possibly less liquid,” and consolidation into larger mainstream schemes will be beneficial.

6) The most significant thing to remember: “free switch” window (deadline)

As per the communication received, subscribers willing to affect a transfer of their funds from Scheme A to any other asset classes may do so free of charges until 25 December 2025, according to guidelines.This is imperative.

What that means to me

In a normal scenario, the switching could be restricted/subject to conditions according to the operational

Finally, the regulator is making the special choice window available without extra cost until 25 December 2025 specifically to the affected individuals.

If you are in Scheme A, in my opinion, this deadline should be taken seriously, as it provides the cleanest “no-cost, regulator-backed” solution to reshape and reset your allocation as you wish.

7) What is the consequence of inaction?

Even if you never took any action, you might anticipate one of the following (as a function of implementation):

Your Scheme A bucket may also be mapped/merged into C and E automatically, as per the plan of merger, or

You could be compelled to retouch again because Scheme A will not be available, just as in the earlier cases, or

You may be allocated based on the default allocation rules prescribed in the CRA/POP.

Explaining news sources point out that Scheme A will be consolidated, and loyal customers are being offered a choice to switch until the deadline.

Advice for the benefit of the subscriber: Don’t fall back on “default whatever happens.” Your retirement fund is long-term money-you want the risk associated with your age, objective, and comfort zone.

8) Considerations of Active Choice subscribers regarding the option of reallocating (C, E, G)

After the absorption of Scheme A, the customers will mainly have to select from the following schemes: S (Equity), C (Corporates), G (Govt Securities).

Here’s how to think:

Scheme E (Equity) – growth driver, higher ups/downs

More appropriate when you have a long time horizon (years before retirement).

Unstable in the short term, yet used for long-term growth.

If you tend to panic when markets decline, E exposure should be set to a level that allows for your ability to remain invested.

Scheme C (Corporate Debt) – middle path
This scheme provides coverage

Typically less volatile than common stocks, but has other market risks.

It can be used to provide a stable return while earning a better yield than ultra-safe instruments.

Can be used in a diversified retirement investment plan.

Scheme G (Government Securities) – low risk Generally viewed as more ‘stable’ in terms of credit risk. But may vary with interest rates, however, it is the “Conservative Anchor” of many NPS portfolios. PFRDA’s Master Circular specifies the type of instruments which can form the basis of G & C, thereby reiterating the fact that such are structured asset classes. PFRDA PRO 9) The simple age-based system (useful, but not ideal) This is not a rule under PFRDA, it is actually a general retirement investment strategy to assist you in making a decision post-merger: If you are young (20s-30s) and not close to retirement You can handle higher exposures to E (because you will have the opportunity to recover from the downturns). Hold some of C/G to ensure that in market drops, you do not start panicking and selling. “Mid-career Reduce risk over time: A more balanced allocation of E, C, and G can make more sense. Keep it consistent and stay committed. Near Retirement (50s and above) Start to prioritize stability: More G/C, less E, but not zero. The big mistake that people make close to retirement age has to do with the amount of market Volatility/uncertainty right when they’re going to need the cash.