NPS risk labels: Will PFRDA’s new framework help subscribers make better choices

The National Pension System (NPS) has grown bulkier over the years. What started as a simplistic of fering with two options has transformed into an investment marketplace. NPS subscribers now face more choices than ever. The retirement product now includes multiple lifecycle-oriented funds, specialised schemes, and differentiated strategies by pension funds. Schemes with different features, risk profiles and use cases are vying for attention within the same product shelf. And now, the NPS finds itself at a crossroads.

An expanding product universe complicates the whole basket. It makes comparison and selection very tricky. Mutual funds hit this wall years ago, which led to a proliferation of schemes of different hues and monikers under the same labels. In 2017, the Securities and Exchange Board of India (Sebi) tried to restore order with a directive on fund categorisation and rationalisation. The markets regulator followed it up with another round of rationalisation earlier this year.

Now, the governing body for the NPS, the Pension Fund Regulatory and Development Authority (PFRDA), is undertaking a similar exercise. In a circular on 28 August, it introduced the ‘Standardised framework for classification and presentation of schemes under the NPS’. This aims to move the NPS from a confusing assortment of scheme names and investment choices to a common, risk-based classification system. But does it really simplify choice for the subscriber?

Organising the product shelf

After years of incremental additions to the NPS product basket, the PFRDA has finally recognised the shelf itself needs sorting. It now wants to offer a menu where different dishes are sold under identifiable cuisines.

All NPS schemes will now be housed under five distinct categories: lifecycle-based schemes, Active Choice, NPS Sanchay, Multiple Scheme Framework (MSF), and 4A schemes or curated/thematic schemes. Each category has its own characteristics.

Lifecycle-based schemes automatically adjust asset allocation with age, as per a pre-determined glide path. These come in four variants, identified by their equity exposure, namely Life Cycle Aggressive, Life Cycle 75–High, Life Cycle 50–Moderate, and Life Cycle 25–Low. Initial equity exposure varies from 25% to 75%, gradually reducing with the subscriber’s age. Mutual funds have now adopted this mechanism, offering lifecycle funds of their own. In Active Choice, the subscriber retains the flexibility to choose the asset mix between equities, government securities and corporate bonds. The maximum equity exposure allowed is 75% (for NPS Tier 1) and 100% (for NPS Tier 2). NPS Sanchay is a composite scheme for the informal sector, with a pre-defined investment pattern. Here, the maximum equity allocation is fixed at 25%. In addition, 4A schemes are curated or thematic schemes introduced under Regulation 4A, such as NPS Vatsalya, NPS Swasthya and NPS MSME. This classification forces every NPS scheme into a fixed bucket, organising the growing universe into easily recognisable banners.

One banner, five solutions

NPS schemes now get bucketed into five broad categories:

Introducing risk buckets

Under the earlier architecture, subscribers essentially chose among the common NPS investment options. These could be any one of the lifecycle-oriented funds (under Auto choice) or the Active choice.

The MSF, introduced for non-government subscribers in September 2025, allows pension funds to design multiple schemes separately. Subscribers can hold multiple MSF schemes under the same permanent retirement account number (PRAN). These schemes run varying asset mixes. So risk positioning differs. This is where NPS starts looking much more like an investment platform. Under the new framework, all schemes under the MSF must fall into one of five categories, based on their equity allocation mandate. These can be identified with a label from A to E, with category A carrying the highest risk and category E the lowest. A pension fund can offer up to two schemes per category, per tier. Any existing scheme that straddles more than one category must be repositioned within thirty days. Any surplus schemes must be merged or wound up within 45 days.

The PFRDA circular also explicitly discontinues the earlier distinction between Common Schemes and MSF Schemes.

Going forward, all NPS schemes are to be classified under the new unified framework. This effectively creates a common language for NPS schemes, rather than allowing each pension fund to present products differently. Sumit Shukla, MD and CEO, Axis Pension Fund, notes, “Lifecycle schemes already link asset allocation to a subscriber’s age; placing them within clearly described variants makes the glide path easier to understand. For MSF schemes, the A-to-E categories now connect equity exposure with a recognisable risk band.”

A subscriber can immediately understand that a Category A scheme carries substantially more equity risk than Category D or E. This isn’t merely a labelling exercise. The product shelf is being graded as per the mix of ingredients.

Sneha Pai, Senior Director at consulting firm Nexdigm, asserts, “The introduction of risk buckets brings greater structure and transparency to the NPS framework. By providing a clearer indication of the underlying risk profile, subscribers can make decisions based on their risk tolerance rather than relying predominantly on the fund manager or past performance."

Ajay Kumar Yadav, Group CEO and CIO, Wise Finserv, avers, “The important point is that risk and asset allocation can now become the starting point, rather than the pension fund’s name or recent performance.”

Names get standardised

Along with clear risk framing, the naming convention under the MSF will also follow a common format.

The scheme name will now be broken into four distinct parts: pension fund abbreviation + NPS + category label + scheme name. Tier 2 schemes will be appended with the suffix “Tier 2”. For instance, the highest-risk MSF scheme from pension fund ABC will be named “ABC NPS A Retirement Plan”. A moderate-risk scheme from Pension Fund XYZ will be named “XYZ NPS C Retirement Plan”.

Essentially, scheme names can no longer obscure the underlying risk profile. The uniform format also makes scheme names easier to read and compare.

Disclosures, selection journey

The PFRDA has also prescribed specific information to present to subscribers. Every MSF scheme must now display a risk-o-meter, and every scheme must be benchmarked against relevant market indices.

Pension funds must also maintain an NPS Scheme Essentials document covering the scheme objective, target segment, asset allocation, risk, benchmark, vesting period, charges, taxation, risk management and winding-up provisions. Yadav remarks, “Think of it as an investment identity card for an NPS scheme. The subscriber should be able to understand not only how much a scheme has returned, but also what the scheme is trying to achieve, where it invests and what level of risk it carries.”

The circular also prescribes how the schemes are presented and sold on any platform. All subscriber-facing platforms must now follow a specific sequence for presenting and selecting schemes. Every subscriber journey will follow the same sequence. First, the subscriber picks the scheme type, then the risk category, and finally the pension fund of their choice.

Before this final step, the platform must clearly display all schemes within that category side by side, showing key details such as historical return, benchmark return, applicable charges, risk-o-meter, assets under management (AUM), and launch date, among others.

This makes comparison easier and helps subscribers make an informed choice. When schemes within the same risk category are presented side by side with relevant information, performance becomes much more visible. A pension fund can’t rely as much on brand recognition if its Category B scheme consistently trails another fund’s Category B scheme.

Shukla remarks, “For a subscriber, this creates a decision hierarchy: first identify the appropriate level of risk and degree of involvement, then compare providers.” Pai maintains this represents a shift towards a more scheme-led approach, where investors can evaluate the investment strategy, asset allocation and associated risk before making a choice.

Create your own NPS mix

The rules now allow subscribers to hold more than one scheme under the NPS roof. While you can hold only one lifecycle fund or Active Choice fund at a time, you can additionally hold any number of MSF schemes.

“It means an investor can potentially structure the NPS corpus across more than one strategy rather than necessarily treating the entire corpus as one single investment mandate,” avers Yadav. For example, an investor could combine a higher-equity MSF scheme with a more conservative lifecycle scheme rather than putting the entire contribution into one investment choice.

But this flexibility is useful only with a clear plan. Adding funds to your NPS portfolio without any alignment with the final goal may lead you astray. Yadav maintains that an investor should hold multiple strategies only when there is a clear asset allocation purpose behind doing so. For many subscribers, a simple and well-chosen allocation may still work better than unnecessarily spreading money across several schemes.

Further, subscribers may change pension fund or scheme up to two times in a financial year. A change in both at the same time will count as one request. If a subscriber has multiple schemes, one can be merged into another.

However, after the merger, the investment becomes subject to the target scheme’s rules, including its vesting period, withdrawal limits and other conditions. So, while a switch retains your previous record, a merger resets the clock.

MSF schemes now get segregated as per risk label

MSF stands for Multi Scheme Framework, where pension funds can design differentiated schemes. A pension fund can offer up to two schemes in each category in each tier. Source: PFRDA

What changes in NPS

Source: Wise Finserv

Final word

The problem NPS faces today is no longer lack of choice; it is how to make that choice intelligible to ordinary investors. It has already built the ecosystem. The latest policy shift imposes a universal language and structure.

Shukla maintains, “Greater choice can create confusion, but only when the choices are not organised around the subscriber’s needs. The new framework addresses precisely this issue.” Innovation expanded the menu; standardisation now provides the common language needed to compare it, he adds.

Yadav says, “Earlier, NPS gave subscribers investment choices. The new framework is trying to make those choices more understandable, comparable and aligned with risk.”

The NPS has received numerous facelifts over the years. Expanded choices, withdrawal relaxations, easier switches, graded exit, additional tax benefits, and more. Now, it gets a cleaner structure with a coating of transparency.

“The NPS has evolved significantly from being viewed primarily as a retirement-focused savings product to becoming a more flexible, market linked retirement investment option. The latest standardisation framework is another step towards making the product more transparent and easier to evaluate,” remarks Pai.

More order is not the same as more clarity. Whether this actually makes choosing easier for the subscriber, or just easier to sort through, is the test that lies ahead.