Focus Shifts to PFRDA as Pension Funds Flag Issues With Bond Rules

Pension fund managers are asking the Pension Fund Regulatory and Development Authority (PFRDA) to ease two rules they say are hurting returns and making it harder to manage money. Their main concern: how long they must wait to get returns if a corporate bond has just one credit rating.

The issue has become more urgent this quarter. Managers say current rules limit their choices and reduce earnings for investors.

The push comes as the National Pension System (NPS) Assets Under Management (AUM) hit ₹14.4 trillion in March 2025, nearly triple the size from five years ago.

The rule in question was part of a circular issued by PFRDA in March 2025. It says funds cannot invest more than 10 percent of a corporate bond holding in securities with less than three years left to mature. Fund managers want this changed, saying it no longer fits how credit markets work today.

Rating Rule Blocks Access to Key Sectors

Fund managers also want the regulator to allow investments in corporate bonds that have only one credit rating. Right now, pension funds can only invest in bonds that have two ratings.

Many mid-sized manufacturing and infrastructure companies choose to get just one rating because getting a second one takes more time and money. As a result, pension funds miss out on potential investments, even though credit markets are steady and demand for funds is growing.

The Association of NPS Intermediaries (ANI), representing pension fund managers, has submitted a detailed request to PFRDA regarding these changes. These inputs follow months of internal analysis and have been submitted with backing data, according to officials quoted in a July 2025 report by The Economic Times.

Asset Share Shifting Steadily

Rising AUM has also brought new pressure to deliver better returns through diversified exposure. Data published in the same report highlights a notable shift: the share of corporate bonds in NPS portfolios declined from 27.2 percent in March 2023 to 23.7 percent by March 2024.

During the same period, the share of government securities saw a marginal increase.

Read More – PPF vs NPS: Which is the Better Long-Term Investment?

A category introduced by the Reserve Bank of India (RBI) in 2023 to track pension-sector sovereign bond holdings points to growing central attention on this asset class. This data is now being used to evaluate concentration risks within retirement portfolios.

To better understand the rising investment mix, the following table outlines current portfolio allocations:

Asset Type	March 2023	March 2024
Corporate Bonds	27.20%	23.70%
Government Securities	61.40%	65.20%
Equities & Others	11.40%	11.10%

Why Liquidity Matters Now

Short-term bonds are seen as safer and easier to sell quickly. Pension fund managers say the current limit on investing in bonds with less than three years to maturity makes it harder to handle risk when markets are unstable. In many developed countries, short-term bonds help pension funds manage cash flow and cover upcoming payouts.

ANI's submission explains that fund managers are not seeking unrestricted access, but rather a reviewed cap or a tiered system based on asset quality or issuer category.

A snapshot of current regulatory limits shows the following:

Instrument Type	Current Cap (%)	Proposed Revision
<3-year Corporate Bonds	10% of bond corpus	Raise the limit or make it flexible
Single-Rated Bonds	Not allowed	Allowed under thresholds
Government Securities	No cap	Continue unrestricted

The report also notes that other long-term investors like insurance companies have received similar flexibilities in the past. This includes broader access to derivative tools and relaxed exposure norms. Pension funds are now looking for equal footing.

What’s Next For The PFRDA?

The PFRDA has not yet officially responded to ANI’s submission. However, officials have indicated that the request is under review and that any change would require an amendment to existing guidelines. A technical panel may be formed to study the implications of altering the dual-rating rule and modifying maturity-based restrictions.

Also Read - Understanding Bond Ratings and Their Importance

In the meantime, fund managers are continuing to adjust their strategies within the existing framework. Several are reportedly increasing exposure to high-quality PSU bonds and diversifying within permitted equity limits.

A quick look at past rule changes helps understand regulatory direction:

Year	Policy Update	Impact Area
2021	Equity exposure cap raised to 15% for private NPS	Diversification
2023	RBI begins tracking pension G-sec exposure	Transparency
2025	March circular enforces dual-rating and maturity cap	Fixed Income Investments

Industry stakeholders expect clarity before the end of Q3 2025, as PFRDA prepares for its annual compliance audit cycle. If changes are approved, new investment guidelines may be notified in early 2026.

Until then, the pension industry will be watching closely. Any relaxation could mean improved risk-adjusted returns for the millions of Indian citizens counting on the National Pension System for their future.

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