India's $175 billion pension industry resists new bond valuation rules

PFRDA, has recently proposed that funds value at least part of their bond holdings on a “held-to-maturity” basis, with the remainder valued at market price,

Indian pension managers have countered an industry regulator’s proposal aimed at shielding the $175-billion industry from bond volatility, saying it could distort fund values, according to people familiar with the matter.

The issue is how pension asset managers value government securities in their funds, which are currently accounted for at the latest market price.

The Pension Fund Regulatory and Development Authority, or PFRDA, has recently proposed that funds value at least part of their bond holdings on a “held-to-maturity” basis, with the remainder valued at market price, according to a consultation paper.

But several fund managers have requested the regulator allow customers to decide whether they want a separate category that values bond holdings on an HTM basis rather than introducing the measure across existing investment plans, the people said, asking not to be named discussing private matters.

The matter “is in the discussion phase”, said S. Ramann, chairman of the PFRDA.

The regulator’s proposal reflects India’s challenge in attracting long-term investment in its bond market and keeping borrowing costs stable as it seeks to cushion the economy from steep US tariffs. Bonds sold off in August as investors stepped back from government auctions amid fears of a widening deficit and lower growth potential.

Pension funds are central to this effort: they held Rs 2.8 lakh crore of 15-year-and-longer bonds at the end of August, official data show.

A held-to-maturity approach allows a fund to keep a bond on its books at cost, regardless of its current market price, with adjustments made for accrued income and amortization. According to the regulator’s proposal, this would let a fund insulate itself from short-term swings and illiquid market moves.

But as pension rules allow investors to switch in and out of plans up to four times a year to lock in gains or avoid losses, some funds worry that the introduction of an HTM category could be problematic for those who choose to stay put, the people said. That’s because fund withdrawals could force managers to sell bonds at lower-than-accounted-for prices, hurting remaining investors, they said.

Also, while an HTM category may shield pension funds from losses when bond prices fall, it could reduce their flexibility when markets improve, the people said. A valuation category that distorts funds’ net asset values may also create mismatches between assets and liabilities, as it would restrict how much pension funds can sell at any given time, they said.