The Pension Funds Regulatory and Development Authority (PFRDA) has released fresh guidelines on the valuation of securities in which pension funds in the National Pension System (NPS) can invest.
In a key change, the valuation of a debt security which does not have a market price on a particular day will be done using a more stringent, scrip-level method than the earlier valuation matrix. The new rules will be implemented from 1 December 2019.
Currently, the securities in which NPS can invest include direct equities and debt securities.
A senior investment executive at a pension fund said that the key change is a shift away 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 a 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 new guidelines also specify what is to be done for debt securities rated below investment grade. For those securities which are downgraded 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. However, for securities not meeting these conditions, pension funds will have to use an indicative matrix or price provided by the valuation agency. Pension funds in NPS were hit by exposure to multiple cases of bad debt such as IL&FS and DHFL groups. However, the impact of bad debt as a percentage of fund assets was relatively small.