Journal of Sustainable Finance & Investment

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Risk-adjusted performance evaluation of pension

fund managers under social security schemes
(National Pension System) of India

Krishna Murari

To cite this article: Krishna Murari (2020): Risk-adjusted performance evaluation of pension
fund managers under social security schemes (National Pension System) of India, Journal of
Sustainable Finance & Investment, DOI: 10.1080/20430795.2020.1857635

To link to this article: https://doi.org/10.1080/20430795.2020.1857635

Published online: 21 Dec 2020.

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JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
https://doi.org/10.1080/20430795.2020.1857635

Risk-adjusted performance evaluation of pension fund

managers under social security schemes (National Pension
System) of India
Krishna Murari
Deptartment of Management, Sikkim University (A Central University), Gangtok, India

ABSTRACT ARTICLE HISTORY

Along with the Employees Provident Fund Organisation (EPFO) and Received 6 August 2020
central civil services pension schemes, the government of India Accepted 25 November 2020
implemented National Pension System (NPS) architecture in 2009
KEYWORDS
to provide social security benefits to the poor and Risk-adjusted performance;
underprivileged section of the society in their post-retirement pension fund managers;
time. Accordingly, various schemes were offered by the listed National pension System
private Pension Fund Managers (PFMs), and subsequently, the no.
of subscribers and corpus also increased over a period of time.
But whether the PFMs were able to meet the expectations of the
subscribers is the main focus of this study. Using data from the
NPS trust organisation’s annual reports and the Bombay Stock
Exchange for 2011–2019 market returns, we assess the
performance of the listed PFMs under different NPS schemes
based on risk-adjusted performance measures viz. Sharpe,
Treynor and Jensen’s alpha. Our analysis reveals that LIC Pension
Funds Ltd has dominated and performed better than other PFMs
under Sharpe ratio & Jensen’s performance measures. The
performance of PFMs under Treynor’s ratio indicated the variation
in different NPS schemes. However, HDFC pension fund managers
outperformed over the other PFMs in the equity and fixed
income segment of NPS schemes. The findings of the study imply
the holistic comparison of the performance of all the pension
fund managers listed under various NPS schemes in India.
Besides, the application of risk-adjusted performance measures
makes it relevant to catch the attention of the stakeholders such
as PFRDA, subscribers and especially the PFMs.

1. Introduction
Many countries in the world create special funds where workers and employers contribute
money to that fund for usage during retirement. This pooling of funds is commonly called
as pension fund (Ahmad and Nor, 2015). The main goal of a pension fund is to provide a
secure source of income to individuals after retirement. Thus, a country’s pension system
serves as a basic component of its social safety net. The Central Government of India
introduced the National Pension System (henceforth NPS) with effect from 1 January

CONTACT Krishna Murari krishnamurari9@gmail.com Deptartment of Management, Sikkim University (A Central

University), Gangtok, Sikkim, India
© 2020 Informa UK Limited, trading as Taylor & Francis Group
2 K. MURARI

2004 (except for armed forces), and it was made available to all citizens of India from 1
May 2009. NPS regulated by Pension Fund Regulatory & Development Authority (hence-
forth PFRDA) is an important milestone in the development of a sustainable and efficient
voluntary defined contribution pension system in India. The contributions of central and
state government employees are invested in the default schemes of three public sector
Pension Fund Managers1 (PFMs). Each of the PFMs invests the contributions in the pro-
portion of 85 percent in fixed income instruments and 15 percent in equity and equity-
linked mutual funds (Sane and Thomas, 2014). On the other hand, contributions of
non-government (private) voluntary customers of the NPS can be invested in any of
the three asset classes viz. E-equity market instruments, C-fixed income instruments
and G-government bonds. Besides the above, NPS Corporate Sector Model is the custo-
mised version of NPS to suit various organisations and their employees to adopt NPS
as an organised entity within the purview of their employer–employee relationship.
Any individual not being covered under any of the above schemes/sectors has been
allowed to join NPS architecture under the ‘All Citizens of India’ sector model from 1
May 2009. All these schemes aim at providing social security after retirement from work.
Although the Indian government is trying to bring every citizen in the ambit of NPS so
that the beneficiaries should not have difficult times in their older days, it has not been
perceived as the best retirement solution by the stakeholders. It has been more than 15
years since the launch of the National Pension System (NPS) in India. Over the years, the
Government of India introduced more benefits to its subscribers such as additional tax
deduction, increase in the percentage of withdrawal on maturity and increase in
employer contribution in case of government sector employees, etc., to make the NPS
investment more attractive and provide income security after the retirement of the
employees. Despite the government’s efforts to make NPS more attractive, the subscri-
bers criticise it on many fronts. According to an online survey conducted by ET
Wealth (Zaidi, 2018), major pain points that make NPS less attractive are as follows:
tax on NPS corpus on maturity, compulsory annuity after retirement, no withdrawals
till retirement and no assurance of returns. Lower returns on the annuity, availability
of better investment plans such as mutual funds, PPF, ELSS, etc., poor liquidity and
limited choice of fund managers are some other reasons for criticising the NPS invest-
ment for retirement planning. For government and corporate employees, there is no
option except to invest in NPS. Thus, the investment in NPS has attracted a lot of criti-
cism from the subscribers of NPS in India.
Given the background above, it is imperative to evaluate the performance of pension
fund managers under NPS architecture in the Indian context. This makes us to ponder
upon as to whether the investment in NPS is still a better option for retirement planning
as compared to other options? Therefore, this study shall broadly examine the financial
nature of these funds by scrutinising their risk-return, asset allocation and investment
performance evaluation based on risk-adjusted performance evaluation approaches. It
is also important to know to what extent the PFMs are able to deliver their promises
over a period to the subscribers?
The remainder of the paper is organised as follows: Section 2 provides a glimpse of the
literature reviewed to highlight the research gap. Section 3 underlines the data and meth-
odology followed by results and discussion in Section 4. Conclusion about findings and
implication is given in Section 5.
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 3

2. Literature review
Pension plans provide financial security and stability during old age when people don’t
have a regular source of income. Retirement plan ensures that people live with pride and
without compromising on their standard of living during advancing years. A pension
scheme gives an opportunity to invest and accumulate savings and get a lump sum
amount as regular income through an annuity plan on retirement. According to the
United Nations Population Division, World’s life expectancy is expected to reach 75
years by 2050 from the present level of 65 years (Koti, 2016). The better health and sani-
tation conditions in India have increased the life span, and subsequently, the number of
post-retirement years has also increased. Thus, the rising cost of living, inflation and life
expectancy make retirement planning an essential part of today’s life. To provide social
security to more citizens, the Government of India has started the National Pension
System.

2.1. Coverage & outreach of NPS

Pension reforms in India in the last decade have seen three major initiatives: a typical
civil servants’ pension scheme, the NPS for all citizens and the NPS Lite for the economi-
cally disadvantaged sections with small savings. The NPS has seen a lukewarm response
so far, with a majority of subscribers being central and state government employees, for
whom the scheme is mandatory (Sanyal et al., 2011a). Investments in NPS till retirement
do not even guarantee a minimum pension after retirement, thus defeating its ‘welfare’
orientation (Sanyal et al., 2011b). The design and architecture of the reformed civil
service program, the National Pension System, were subsequently extended to those
employed in private formal and informal sectors. The bulk of India’s working population
is employed in unorganised sectors and doesn’t have a well-defined pension mechanism.
The last decade witnessed a significant increase in life expectancy due to advances in
medical practice and improvement in living style, which warrants the need for prolonged
and sufficient post-retirement income and subsequently increased the cost on employers
(Kumar and Saikia, 2015). The informal sector employees or workforce in the unorga-
nised sector face problem due to lower earnings and sudden change in the pension
fund from EPF to NPS created problems for them (Hu and Stewart, 2009). The govern-
ment needs to implement some of the pension reforms so that informal sector people can
get the benefits according to their needs. A non-contributory, basic pension can guaran-
tee a regular income in old age to all residents of the country, regardless of earning or
occupation (Narayana, 2019). It is argued that a properly crafted universal pension
scheme will increase the coverage of pension without putting stress on the fiscal policies
(Singh et al., 2015).
The current NPS has deviated from its goals in certain critical areas. These include a
multiplicity of schemes, lack of investment choice, low transparency of the system and a
lack of focus on keeping asset management fees low (Sane and Thomas, 2014). The policy
concerns towards well-designed pay-out policies and occupational pension systems may
leverage the institutional development of the NPS to include the informal workforce. It is
argued that the low coverage level, the underperformance of provident fund schemes due
to investment restrictions and financial difficulties in administering unfunded public
4 K. MURARI

pension programmes have rendered the current system ineffective and unsustainable.
The design features of NPS Lite and Atal pension Yojana (APY) schemes are such that
they fail to take the specific characteristics of unorganised worker households into
account (Rajasekhar et al., 2017). If the government plays an active involvement in the
investment performance of the pension fund in the stock market, there would be less
risk (Imam, 2011).

2.2. Risk-adjusted performance of pension schemes

Increased participation of private pension funds in the market has led to the search for
methods that would provide investors with information that meets their expectations and
explains the increasing amount of academic and professional research devoted to per-
formance measurement (Le Sourd, 2007). The traditional measures of risk-adjusted per-
formance, Sharpe and Treynor, and to evaluate the ability of fund managers (Jensen’s
alpha) were applied to Italian funds (Gallo, 2008). The performance of mutual funds
and their ranks was found to be the same by performing both the Sharpe and Treynor
risk-adjusted performance measures (Jagric, Podobnik, Strasek, & Jagric, 2007). The
rankings revealed that all analysed funds outperformed the market on a risk-adjusted
basis. The application of Sharpe, Treynor & Jenson’s measures to assess the performance
of Croatian mandatory pension funds revealed that funds reached their investment
targets in terms of risk-free rates or benchmarks, and evidence of investment skill was
found in some of the funds analysed (Matek et al., 2016). The risk-adjusted measure
was also applied to evaluate the performance of pension fund managers listed under
NPS in India (Ananth and Gurunathan, 2016). The studies done in the past globally
have shown that over the long term, equity as an asset class has generated a higher
inflation-adjusted return over other asset classes such as debt, gold and real estate
(Ahmad and Nor, 2015). Pension funds typically hold low proportions in equity in
their portfolios which hamper their growth but at the same time, low equity proportions
means more safety for pension funds (Imam, 2011).
Although the studies have been conducted to portray the coverage and outreach of the
pension system in India and evaluating the performance of pension funds using risk-
adjusted performance measures across the globe, very few studies have focussed on
the evaluation of various NPS schemes in India. This study is an attempt to provide a
comprehensive evaluation of various schemes offered by the Government of India
under NPS architecture offering social security benefits to the subscribers. The study
shall also try to find out the best and worst pension fund manager under various
schemes of NPS based on the popular risk-adjusted performance measures.

2.3. Objectives of the study

Given the literature reviewed, it has been reported that the PFMs are instrumental in
managing the funds of the subscribers and provide the maximum possible returns
thereon. Therefore, it is imperative and essential to make an assessment of the perform-
ance of the PFMs under the uncertain market conditions to ensure social security to sub-
scribers during their retirement period. Although there is substantial literature on the use
of risk-adjusted performance evaluation tools for various investment options, the studies
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 5

on a risk-adjusted performance evaluation of PFMs under NPS are scanty in the Indian
context. Therefore, the main aim of the study is to analyse the risk-return trade-off that
the pension fund managers are considering while making investments in various
schemes of NPS to provide the optimum returns to their subscribers. The major objec-
tives of the study are as follows:

. To examine the relationship between risk and returns of Sensex and Pension fund
managers.
. To analyse the performance of the pension fund managers using risk-adjusted per-
formance measures.

3. Data & methodology

The study is based on secondary data from BSE and NPS trust organisation. The data for
the market risk and returns analysis have been taken from the BSE website over a period
of 8 years from 1 March 2011 to 31 April 2019, and the average yearly returns of the
various pension fund managers are obtained from the annual reports of NPS trust.
The index return of Sensex is considered as a proxy for the market return and has
been computed using the formula:
Daily Return = ln(It /It−1 )
where ln = Natural logarithm; It is a closing index on day t; and It-1 is the closing index of
the previous day.
After calculating the daily returns, the annualised index returns for each year are cal-
culated by summing up the daily returns for each year as logarithmic returns are additive
due to its additive property. The outperformance of the PFM is measured by taking the
differential of its average return and index return. If it is positive, it implies that PFM out-
performed the market during the year, otherwise it underperformed.
The volatility is calculated using the standard deviation of the annual returns gener-
ated by PFMs; it measures the spread of annual returns around the average returns of the
pension fund.
















 (Ri − Ri )2
Volatility in Returns = ,
n−1
where Ri is the annual returns generated by the PFMs and Ri is the average of returns for
n, number of years.
Beta (b) is considered as a measure of the market risk or systematic risk that is calcu-
lated using the slope function in excel.
CAPM returns or expected returns of the PF are calculated using the following
equation:
CAPM Return = Rf + b(Rm − Rf ),
where Rf is the risk-free rate of return, β is a measure of systematic risk and Rm is the
proxy for market index return. Portfolio performance measures are pivotal in
6 K. MURARI

determining decision-making in any investment. Following three risk-adjusted fund per-

formance measures have been used in evaluating the performance of the pension funds of
various schemes under NPS.

1. Sharpe ratio: It evaluates the portfolio manager based on both the rate of return and
diversification, hence proving that the portfolio with the highest average return may
not necessarily be the best portfolio. The calculation approach used for this ratio is
(Ri − Rf )/si . Here, si is the volatility in the returns of the pension fund. The
higher the ratio, the better is the performance of the pension fund manager.
2. Treynor’ ratio: It measures the relationship between market returns and portfolio
returns of which the resulting value represents the portfolios return per unit risk.
The calculation approach used for this ratio is (Ri − Rf )/b. Here, b is the measure
of systematic risk in the market. The higher the ratio, the better is the performance
of the pension fund manager.
3. Jensen’s alpha (α): It measures the excess return that a portfolio generates over its
expected return. It is a risk-adjusted performance measure that represents the
average return on a portfolio above or below that predicted by the capital asset
pricing model (CAPM). The calculation approach used for this ratio is Average
Fund Return–CAPM Return. The higher the ratio, the better is the performance of
the pension fund manager.

4. A comparative analysis of the performance is made for all the PFMs based on the
above performance measures.

4. Results & discussion

Government of India established the Pension Fund Regulatory and Development Auth-
ority (PFRDA) on 10th October 2003 to develop and regulate the pension sector in the
country. The National Pension System (NPS) was launched on 1st January 2004 with the
objective of providing retirement income to all the citizens. NPS aims to institute pension
reforms and to inculcate the habit of saving for retirement amongst the citizens. Initially,
NPS was introduced for the new government recruits (except armed forces). With effect
from 1st May 2009, NPS has been provided for all citizens of the country including the
unorganised sector workers on a voluntary basis.
Since 2008, there has been a rapid growth in number of subscribers and assets under
management in NPS under various categories for all eight fund managers (Figure 1). The
subscriber base has increased from 4.30 lakhs in March 2009–124.01 lakhs in March 2019
with a growth rate of 39.94% in the last 10 years. On the other hand, the assets under
management in various categories of NPS have shown a growth rate of 63.59% for the
last 10 years. Although there has been a substantial increase in the customer base
under NPS, customers have raised concerns over the issues related to the retirement
benefits which they will be receiving after retirement. Keeping these issues in mind, on
10 December 2018, the Government of India made NPS an entirely tax-free instrument
in India where the entire corpus escapes tax at maturity; the 40% annuity also became
tax-free. The contribution under Tier II of NPS is covered under Section 80C for deduc-
tion up to Rs. 1.50 lakh for income tax benefits, provided there is a lock-in period of three
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 7

Figure 1. Growth in subscribers and Assets under management in NPS (as on March 2019).

years. NPS is limited EEE (Exempt-Exempt-Exempt), to the extent of 60%, 40% has to be
compulsorily used to purchase an annuity, which is taxable at the applicable tax slab.
With growing expectations and in view of making NPS a more lucrative option for
retirement planning, an additional tax benefit of Rs 50,000 under Section 80CCD(1b)
is provided under NPS since 2016, which is over and above Rs 1.5 lakh exemption of
Section 80C. Private pension fund managers are important parts of NPS and are now
considered as one of the best tax-saving instruments, after 40% of the corpus was
made tax-free at the time of maturity, and it is ranked just below equity-linked savings
scheme (ELSS).
Among the pension funds of the CG scheme, the SBI pension fund offered the highest
returns of 10.15% since inception (Table 1). LIC pension fund offered the highest returns

Table 1. Inception date and Scheme wise Fund Managers’ Performance (as on 26 July 2019).
Scheme/Pension Fund Inception Date AUM (Rs Crores) Subscribers Returns since Inception
SCHEME –CG
LIC Pension Fund Ltd. 1-Apr-08 37,845.65 2,007,144 9.88%
SBI Pension Funds Pvt. Ltd 1-Apr-08 42,537.67 2,007,145 10.15%
UTI Retirement Solutions Ltd. 1-Apr-08 40,422.45 2,007,144 9.82%
SCHEME – SG
LIC Pension Fund Ltd. 25-Jun-09 58,878.07 4,482,292 9.92%
SBI Pension Funds Pvt. Ltd 25-Jun-09 61,038.62 4,482,292 9.81%
UTI Retirement Solutions Ltd. 25-Jun-09 59,705.80 4,482,292 9.82%
SCHEME-Corporate CG
LIC Pension Fund Ltd. 5-Nov-12 2,208.75 47,297 10.25%
SBI Pension Funds Pvt. Ltd 1-Nov-12 20,885.81 453,780 10.07%
SCHEME- NPS Lite
Kotak Mahindra Pension Fund Ltd. 30-Jan-12 55.65 26,636 10.36%
LIC Pension Fund Ltd. 4-Oct-10 1,041.48 3,378,935 10.48%
SBI Pension Funds Pvt. Ltd 16-Sep-10 1,487.73 4,328,080 10.48%
UTI Retirement Solutions Ltd. 4-Oct-10 1,018.82 3,379,326 10.42%
SCHEME – APY
LIC Pension Fund Ltd. 4-Jun-15 2,697.60 16,684,102 9.88%
SBI Pension Funds Pvt. Ltd 4-Jun-15 2,788.75 16,684,102 9.37%
UTI Retirement Solutions Ltd. 4-Jun-15 2,688.19 16,684,102 9.90%
8 K. MURARI

of 9.92% since its inception under the SG scheme. LIC Pension fund recorded the highest
return of 10.25% as compared to SBI Pension funds which recorded 10.07% returns
under the corporate CG scheme. LIC and SBI have shown similar returns of 10.48% fol-
lowed by UTI Retirement solutions with 10.42% and Kotak Mahindra Pension Fund at
10.36% under the NPS Lite scheme. Atal Pension Yojana (APY) scheme has recorded the
highest number of subscribers despite the late commencement of the scheme (inception
year 2015). LIC has generated the maximum returns across all the fund managers in all
schemes except scheme CG and APY. The fund managers of the NPS Lite
Scheme recorded the highest returns (more than 10%) across all the schemes.

4.1. Performance of pension fund managers in NPS schemes for organised

sector
SBI Pension Funds is the largest pension fund manager (PFM) in India. At present, central
government employees have no choice in the matter of selection of fund manager or
investment allocation in NPS, as both are decided by the government. All the NPS con-
tributions of Central government employees are being distributed evenly across three
public sector fund managers viz. LIC Pension Fund, SBI Pension Fund and UTI Retire-
ment Solutions. LIC Pension Fund recorded the highest average returns over the
period of study and the least volatility in both CG and SG schemes (Table 2). In order
to assess the risk-adjusted fund performance, the G-Sec return of 6.57% is used as a
risk-free rate of return for all calculations. The systematic risk (Beta) has been the least
for SBI Pension Fund in both the schemes. The Treynor’s ratio and Jensen alpha have
been the highest for SBI Pension Fund in both the schemes of CG & SG indicating the
best fund manager amongst the three fund managers. However, considering the Sharpe
ratio LIC Pension Fund has outperformed amongst the three fund managers.

4.2. Performance of PFMs in NPS schemes for unorganised/private sector

Initially, NPS was introduced for the new government recruits (except armed forces). But,
with effect from 1st May, 2009, NPS has been provided for all citizens of the country includ-
ing the unorganised sector workers on a voluntary basis. Additionally, to encourage people
from the unorganised sector to voluntarily save for their retirement the Central Govern-
ment launched a co-contributory pension scheme, i.e., Swavalamban Scheme (NPS Lite)

Table 2. Performance PFMs under Scheme CG and SG under NPS.

Pension Fund Managers Pension Fund Managers
Scheme CG Scheme SG
Performance Measures LIC SBI UTI LIC SBI UTI
Average Returns 9.57 9.56 9.54 9.79 9.76 9.68
Outperformance 1.43 1.42 1.41 1.66 1.62 1.54
Volatility (Std. Dev) 4.51 4.84 4.54 4.62 4.91 4.66
Beta 0.23 0.21 0.22 0.22 0.19 0.21
CAPM Return 6.93 6.90 6.92 6.91 6.87 6.90
Sharpe Ratio 0.66 0.62 0.66 0.70 0.65 0.67
Treynor’s Ratio 13.13 14.29 13.47 14.84 16.44 14.87
Jensen Alpha 2.64 2.66 2.63 2.88 2.88 2.78
Note: Average Market (BSE) Return: 8.14% with Volatility 11.76%; G-Sec Return: 6.57%.
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 9

in the Union Budget of 2010–2011. Under NPS Lite, the government assured a contribution
of Rs.1000 to each eligible NPS subscriber who contributes a minimum of Rs.1000 and a
maximum Rs.12,000 per annum. This scheme was applicable up to F.Y. 2016–2017. The
Government of India also launched Atal Pension Yojana (APY) to cover all the peoples
in the unorganised sector in 2015 for the poor and underprivileged section of the
country. The subscriber can choose to invest either, wholly or in combination, in four
types of investment schemes offered by the pension fund managers. These are as follows:

(a) Scheme E (equity) allows up to 75% equity participation, this is invested in stocks.

(b) Scheme C (corporate debt) invests only in high-quality corporate bonds up to 100%
(c) Scheme G (government/gilt bonds) invests only in government bonds up to 100%

(d) Scheme A (alternative investment) which allows up to 5% (newly added asset class
only for private sector subscriber with active choice)

Alternatively, the subscriber can opt for the default scheme where as per the time left
to retirement his portfolio is rebalanced each year for the proportion of equity, corporate
bonds and government bonds. NPS offers two types of accounts to its subscribers: Tier I –
the primary account, which is a pension account with restrictions on withdrawals and
utilisation of accumulated corpus. All the tax breaks that NPS offers are applicable
only to the Tier I account.
Tier II – in order to introduce some liquidity to the scheme, the PFRDA allows for a
Tier II account where subscribers with pre-existing Tier I accounts can deposit and with-
drawn money as and when they want. NPS Tier II is an investment account, similar to a
mutual fund in characteristics, but offers no Exit load, no commissions and good returns.
Tier II NPS account offers tax benefits to government employees under certain con-
ditions. The investments under these accounts are managed by the PFMs to provide
maximus returns. The following sections evaluate the performance of PFMs under
various schemes of NPS.

4.2.1. NPS scheme E-Tier I and Tier II

Investment in scheme E allows the PFMs to allocate investment in equity stocks to an
extent of 75% and trade on a high risk-return approach. This scheme is suitable for
young subscribers who can take high risks and enjoy the high returns as they have
sufficient time till retirement. Currently, there are eight pension fund managers in
Scheme E – Tier I and II including the Birla pension fund as a new entrant in the year
2017. Birla Pension fund being a new entrant has been excluded from the comparison.
All the PFMs outperformed the BSE market index returns during the period of study.
HDFC Pension Fund offered a highest average return of 16.84% in Tier I and 12.71%
in Tier II followed by LIC pension fund with 13.38% in tier I and UTI Pension Fund
in tier II with 11.08% during the period of study under Tier I. The volatility has been
the minimum for LIC Pension fund in tier I and HDFC in tier II over the period of
study. HDFC Pension Fund has been identified as the best pension fund manager in
both tier I and tier II account of scheme E with the highest ratios as per all the three
risk-adjusted performance measures, i.e., the Treynor, Sharpe and Jensen alpha (Table 3).
10 K. MURARI

4.2.2. NPS scheme C-Tier I & Tier II

The investment in scheme C of NPS architecture does not give much choice of invest-
ment options to the PFMs as they have to allocate maximums funds to high-quality cor-
porate bonds. Despite this, the analytical skills and experience in the selection of
appropriate bonds by the PFMs determine the returns under the scheme. The results
of risk-adjusted performance analysis reveal that HDFC Pension Fund has shown a
maximum average return of 11.34% in tier I account followed by LIC and ICICI at
11.17% and 10.56%, respectively (Table 4).
However, Reliance has shown a greater consistency in generating the returns over
the years as reflected by its volatility measure (3.07). Under the Tier II account,
ICICI was the top performer with 10.5% average returns followed by UTI and
Kotak with 9.89% and 9.75% average returns. HDFC showed greater consistency in
returns over the years in tier II accounts. As per the Sharpe and Jensen ratio,
HDFC Pension Fund has been the best performing pension fund manager while
Jensen ratio supports ICICI Prudential Pension Fund as the best pension fund
manager. Birla Sun Life Pension Fund has been excluded due to its recent entry into
the scheme (May 2017).

4.2.3. NPS scheme G-Tier I and Tier II

The PFMs have fewer choices under scheme G of NPS as the investment is to be allocated
under government/gilt bond to a maximum of 100 percent. However, the proportion to
these bonds for maximising the returns is the prerogative of PFMs only. Our analysis
reveals that the LIC Pension Fund generated the highest average returns in both tier I
and II accounts with greater consistency as compared to other PFMs (Table 5). As per
the Sharpe and Jensen’s risk-adjusted performance measure, LIC Pension Fund was
the best performer while Kotak pension Fund has been regarded as a better PFM as
per the Treynor ratio in both the types of accounts.

Table 3. Risk-Adjusted Performance Analysis of Scheme E-Tier I & Tier II of NPS (As on 31st May 2019).
Pension Funds under Scheme E of NPS
Performance Measures Type of Account LIC SBI UTI ICICI KOTAK RELIANCE HDFC BIRLA
Average Returns Tier I 13.38 11.03 11.02 10.97 10.76 9.90 16.84 10.25
Tier II 9.05 10.73 11.08 10.74 10.75 10.01 12.71 9.87
Outperformance Tier I 5.24 2.89 2.89 2.83 2.62 1.76 8.70 2.11
Tier II 0.91 2.59 2.94 2.60 2.62 1.87 4.57 1.73
Volatility (Std. Dev) Tier I 11.46 12.17 13.21 12.35 12.60 12.62 13.17 1.03
Tier II 10.72 12.25 13.28 12.87 12.40 12.61 10.08 0.85
Beta Tier I 1.03 1.01 1.09 1.03 1.03 1.04 1.15 0.41
Tier II 0.72 1.01 1.10 1.07 1.02 1.04 0.89 0.34
CAPM Return Tier I 8.18 8.15 8.28 8.18 8.19 8.21 8.37 7.21
Tier II 7.70 8.16 8.29 8.25 8.17 8.21 7.96 7.10
Sharpe Ratio Tier I 0.59 0.37 0.34 0.36 0.33 0.26 0.78 3.57
Tier II 0.23 0.34 0.34 0.32 0.34 0.27 0.61 3.90
Treynor’s Ratio Tier I 6.62 4.41 4.07 4.29 4.05 3.18 8.91 8.97
Tier II 3.42 4.10 4.10 3.89 4.10 3.29 6.93 9.79
Jensen Alpha Tier I 5.20 2.87 2.74 2.79 2.57 1.69 8.46 3.04
Tier II 1.34 2.57 2.78 2.49 2.59 1.80 4.75 2.77
Notes: Average Market (BSE) Return: 8.14% with Volatility 11.76%. G-Sec Return: 6.57%.
Returns above 1-year period are annualised; since inception returns are considered from the respective dates of first cash
flow (inception dates for Birla, HDFC, ICICI, Kotak, LIC, Reliance, SBI and UTI are 9-May-17, 1-Aug-13, 18-May-09, 15-May-
09, 23-Jul-13, 21-May-09, 15-May-09 and 21-May-09, respectively).
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 11

Table 4. Performance: Scheme C- Tier I & Tier II (As on 31st May, 2019).
Pension Fund Managers under Scheme C of NPS
Performance Measure Tier LIC SBI UTI ICICI KOTAK RELIANCE HDFC BIRLA
Average Returns Tier I 11.17 10.17 9.87 10.56 10.15 9.92 11.34 8.63
Tier II 8.64 9.73 9.89 10.50 9.75 9.45 9.14 7.06
Outperformance Tier I 3.03 2.04 1.73 2.43 2.02 1.78 3.20 0.49
Tier II 0.50 1.59 1.76 2.37 1.61 1.31 1.00 −1.08
Volatility (Std. Dev) Tier I 3.67 3.48 3.19 3.29 3.52 3.07 3.31 0.56
Tier II 2.74 3.46 3.23 3.35 3.28 2.96 1.74 0.59
Beta Tier I −0.08 0.03 0.04 0.02 0.03 0.08 −0.07 −0.22
Tier II 0.08 0.03 0.02 0.01 0.05 0.08 0.04 0.23
CAPM Return Tier I 6.45 6.62 6.63 6.60 6.61 6.69 6.46 6.22
Tier II 6.69 6.61 6.60 6.58 6.65 6.69 6.63 6.94
Sharpe Ratio Tier I 1.25 1.04 1.03 1.21 1.02 1.09 1.44 3.70
Tier II 0.75 0.91 1.03 1.17 0.97 0.97 1.48 0.83
Treynor’s Ratio Tier I −60.92 118.12 83.80 206.36 139.26 43.13 −69.25 −9.29
Tier II 27.13 111.46 159.90 447.33 62.49 36.82 70.23 2.08
Jensen Alpha Tier I 4.71 3.56 3.24 3.96 3.54 3.22 4.87 2.40
Tier II 1.95 3.11 3.29 3.92 3.10 2.76 2.51 0.12
Notes: Average Market (BSE) Return: 8.14% with Volatility 11.76%. G-Sec Return: 6.57%.
Returns above 1-year period are annualised; since inception returns are considered from the respective dates of first cash
flow (inception dates for Birla, HDFC, ICICI, Kotak, LIC, Reliance, SBI and UTI are 9-May-17, 1-Aug-13, 18-May-09, 15-May-
09, 23-Jul-13, 21-May-09, 15-May-09 and 21-May-09, respectively).

4.2.4. Scheme NPS Lite

The PFRDA introduced the NPS Lite scheme with effect from 1 April 2010. The NPS Lite
is basically designed with the intention to secure the future of the people who are econ-
omically disadvantaged and who are not financially well to do. The NPS Lite is based on
group servicing. The people forming part of these low-income groups will be represented
through their organisations known as ‘Aggregators’ who would facilitate in subscriber
registration, transfer of pension contributions and subscriber maintenance functions.
Subscribers in the age group of 18–60 can join NPS Lite through the aggregator and con-
tribute till the age of 60.

Table 5. Performance of PFMs under Scheme G- Tier I & Tier II (As on 31st May, 2019).
Pension Fund Managers under Scheme C of NPS
Performance Measure Tier LIC SBI UTI ICICI KOTAK RELIANCE HDFC BIRLA*
Average Returns Tier I 11.13 9.21 8.75 9.40 9.27 9.25 9.65 9.17
Tier II 11.49 9.16 8.82 9.45 9.08 9.20 10.28 4.89
Outperformance Tier I 2.99 1.08 0.62 1.27 1.14 1.11 1.51 1.03
Tier II 3.35 1.03 0.68 1.31 0.94 1.07 2.15 −3.25
Volatility (Std. Dev) Tier I 5.25 5.88 5.83 5.64 5.50 5.67 5.27 0.00
Tier II 4.89 5.86 5.91 5.73 5.48 5.69 4.70 4.18
Beta Tier I 0.32 0.18 0.20 0.18 0.16 0.18 0.24 0.00
Tier II 0.32 0.18 0.20 0.17 0.17 0.17 0.27 1.67
CAPM Return Tier I 7.07 6.86 6.89 6.86 6.82 6.85 6.95 0.00
Tier II 7.07 6.86 6.89 6.84 6.84 6.84 6.99 9.18
Sharpe Ratio Tier I 0.87 0.45 0.37 0.50 0.49 0.47 0.58 0.00
Tier II 1.01 0.44 0.38 0.50 0.46 0.46 0.79 −0.40
Treynor’s Ratio Tier I 14.32 14.35 10.76 15.38 17.09 15.06 12.60 0.00
Tier II 15.35 14.11 11.17 16.61 14.65 15.47 13.78 −1.01
Jensen Alpha Tier I 4.06 2.36 1.87 2.54 2.45 2.40 2.69 0.00
Tier II 4.42 2.31 1.93 2.61 2.24 2.37 3.29 −4.29
Notes: Average Market (BSE) Return: 8.14% with Volatility 11.76%. G-Sec Return: 6.57%.
Returns above 1-year period are annualised; since inception returns are considered from the respective dates of first cash
flow (inception dates for Birla, HDFC, ICICI, Kotak, LIC, Reliance, SBI and UTI are 9-May-17, 1-Aug-13, 18-May-09, 15-May-
09, 23-Jul-13, 21-May-09, 15-May-09 and 21-May-09, respectively).
12 K. MURARI

LIC Pension Fund has generated the highest average returns with minimum volatility
and also the highest ratio for all the three measures of Sharpe, Treynor and Jensen thus
indicating it to be the best fund manager across all the fund managers in the NPS Lite
scheme (Table 6).

4.2.5. Corporate CG and Atal pension Yojana

PFRDA launched a new scheme (Corporate CG) for the corporate sector wishing to invest
in pension funds designed for government employees. Companies can invest in NPS by
selecting either private sector NPS or government NPS. Business has the choice to
select the employee’s fund manager and investment funds. The Government of India is
also concerned about the old age income security of the working poor. To address the
longevity risks among the workers in the unorganised sector and to encourage the
workers in the unorganised sector to voluntarily save for their retirement, the government
announced a new scheme called Atal Pension Yojana (APY) in 2015–2016 budget. The
APY is focussed on all citizens in the unorganised sector. There is a guaranteed
minimum monthly pension ranging between Rs. 1000 and Rs. 5000 per month.
As per our analysis, under the corporate-CG scheme, LIC has outperformed the
market by generating 2 percent excess return while SBI showed underperformance
with −1.3 percent returns since the launch of the scheme. LIC has shown a good per-
formance in terms of Sharpe & Jensen’s measures while SBI was better using Treynor’s
ratio (Table 7).
Under the APY scheme, although all three PFMs showed underperformance than the
market returns, LIC was the lowest return generator since the launch of the scheme in
2015. SBI performed better among all three PFMs in APY in terms of all three risk-
adjusted performance measures.

4.3. Scheme wise best and worst performers

Table 8 shows the best and worst performers in various NPS schemes. This is important
to know from the perspectives of the investors to take investment decisions and selection
of PFMs wisely. Under Sharpe measure of performance LIC has been the best performer
in six schemes out of eleven NPS schemes while SBI was the worst performer in four NPS
schemes. However, the HDFC pension fund was best in the equity & fixed income asset
segment of NPS schemes.

Table 6. Performance: Scheme NPSLite (As on 31st May 2019).

Performance Measure LIC SBI UTI KOTAK
Average returns 10.38 10.12 10.06 10.39
Outperformance 2.25 1.99 1.92 2.26
Volatility 4.52 4.77 4.58 4.89
Beta 0.17 0.17 0.18 0.21
CAPM 6.84 6.83 6.85 6.91
Sharpe ratio 0.84 0.74 0.76 0.78
Treynor ratio 22.32 21.27 19.18 17.86
Jenson ratio 3.55 3.29 3.20 3.49
Notes: Average Market (BSE) Return: 8.14% with Volatility 11.76%. G-Sec Return: 6.57%.
Returns above 1-year period are annualised; since inception returns are considered from the respective dates of first cash
flow (inception dates for Kotak, LIC, SBI and UTI are 30-Jan-12, 4-Oct-10, 16-Sep-10 and 4-Oct-10, respectively)
 JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT 13

Table 7. Performance of Scheme Corporate CG and Atal Pension Yojana (As on 31st May 2019).
Scheme-Corporate-CG Scheme: Atal Pension Yojana (APY)
Performance Measures LIC SBI LIC SBI UTI
Average Return 9.85 9.70 9.26 9.65 9.65
Outperformance 0.02 −0.13 −0.57 −0.18 −0.19
SD 5.74 6.07 4.16 3.93 4.31
Beta 0.32 0.28 0.98 0.93 1.01
CAPM Return 7.62 7.50 9.76 9.60 9.88
Sharpe Ratio 0.57 0.52 0.65 0.79 0.71
Treynor’s Ratio 10.19 11.01 2.75 3.32 3.04
Jensen’s Alpha 2.23 2.20 -0.50 0.05 -0.23
Notes: Average Market (BSE) Return: 8.14% with Volatility 11.76%. G-Sec Return: 6.57%.
*Absolute returns in the financial year as the Inception date for Atal Pension Yojana is 4 June 2015.
Returns above 1-year period are annualised.

SBI, HDFC, ICICI and LIC could perform better in two schemes of NPS under Trey-
nor’s measure while UTI and Reliance pension funds were the worst performers. LIC and
HDFC pension funds performed better in four and three NPS schemes respectively under
Jensen’s measure while UTI was the worst performer among all the PFMs under NPS
schemes. However, HDFC pension fund managers outperformed over the other PFMs
in the equity and fixed income segment of NPS schemes.

5. Concluding remark & implications

Despite the attractive features introduced by the Government of India, the NPS has not
taken off as expected. The total assets of all private NPS Tier 1 subscribers are less than Rs
5000 crore (Nathan, 2016). To make the scheme more attractive to subscribers, the
PFRDA has made several changes in the rules governing the scheme such as increase
equity exposure to life cycle funds, the introduction of new asset classes, 40 percent
corpus made tax free at maturity, deferring the purchase of an annuity for 3 years, allow-
ing early withdrawals, etc. Given all such provisions and initiatives taken by the regula-
tors, the onus of keeping the promises to provide expected returns to the customers
largely depends upon the pension fund managers involved in managing the fund
under a specific scheme. Since the investments under various schemes of NPS are

Table 8. Best and Worst PFMs under various NPS schemes.

Risk-adjusted performance measures
Sharpe Treynor Jensen
NPS Scheme Best PFM Worst PFM Best PFM Worst PFM Best PFM Worst PFM
For Govt. Sector
Scheme CG LIC SBI SBI UTI SBI UTI
Scheme SG LIC SBI SBI LIC LIC UTI
For Non-Govt. (Private) sector
Scheme E-Tier I HDFC RELIANCE HDFC RELIANCE HDFC RELIANCE
Scheme E-Tier II HDFC LIC HDFC RELIANCE HDFC LIC
Scheme C-Tier I HDFC KOTAK ICICI HDFC HDFC LIC
Scheme C-Tier II HDFC LIC ICICI LIC ICICI LIC
Scheme G-Tier I LIC UTI KOTAK UTI LIC UTI
Scheme G-Tier II LIC UTI ICICI UTI LIC UTI
NPS Lite LIC SBI LIC KOTAK LIC UTI
Corporate-CG LIC SBI LIC SBI LIC SBI
APY SBI LIC SBI LIC SBI LIC
14 K. MURARI

subject to market risks, the role of PFMs in generating the returns on the contributions of
the subscribers becomes prominent under uncertain market conditions.
Amongst the five schemes under NPS viz. scheme CG (Central Government), SG
(State Government), Corporate CG, NPS Lite and APY, NPS Lite scheme has recorded
the highest returns across all schemes. Under the NPS schemes for central and state gov-
ernment employees, LIC Pension Funds Ltd and SBI have recorded the highest returns
with more weightage given to LIC Pension Funds Ltd as compared to other fund man-
agers. For the unorganised and private sectors, HDFC Pension Funds has generated the
highest returns while ICICI prudential pension funds have also been given preference by
some statistical measures. However, the overall performance has been dominated by LIC
Pension Funds Ltd under Sharpe ratio & Jensen’s performance measures, thus indicating
it to be the best portfolio with minimum risk compared to all other fund managers. Trey-
nor’s ratio indicated the variation in the performance of pension fund managers under
different NPS schemes. The findings of this study may be useful to the various stake-
holders such as government regulators (PFRDA), subscribers of NPS and pension
fund managers as well. The subscribers can observe how their PFMs are managing the
pension funds for generating higher returns after they retire. The PFRDA may take
note of the performance of the PFMs and necessary steps in case of underperformance.

Note
1. These are LIC Pension Fund Ltd., SBI Pension Funds Pvt. Ltd. and UTI Retirement Sol-
utions Ltd.

Disclosure statement
No potential conflict of interest was reported by the author(s).

ORCID
Krishna Murari http://orcid.org/0000-0003-4535-7153

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