|Old pension thoughts|
|Thursday, 01 September 2011 00:00|
Given that the standing committee on finance has cleared a 26% FDI component in the Pension Fund Regulatory and Development Authority Bill, 2011, the stage is set for the Bill to get passed in the monsoon session of Parliament. Once the Bill is passed by Parliament, it will give the PFRDA—the interim authority that was set up in 2003 through an executive order—statutory powers to regulate the sector. At the moment, if the interim PFRDA has a problem with a fund manager, for instance, it can try and fix it only through the contract—that is, it has to go to court. Once the PFRDA Bill is passed, however, the PFRDA will regulate the sector in the manner that regulators like IRDA and Sebi do, by issuing regulations and orders.
Where the standing committee has got it wrong is on the New Pension Scheme (NPS). It is rightly concerned that the NPS has hardly taken off—of the R9924.72 crore of total assets under management as on July 16, just R100 crore has come from about 51,000 subscribers and the bulk of this has been contributed by two public sector companies which have migrated their employees’ pension to NPS. Government employees who joined service after January 1, 2004 are mandated to come under the NPS. The standing committee’s solution is that the NPS offer a minimum return that is equal to the interest rate offered by the EPFO—if it falls below, the government will chip in (this will also make the fund managers less driven to perform!).
While offering at least the EPFO rate will make the NPS more attractive, the standing committee forgets that NPS was devised only because existing pension schemes such as the EPFO's Employees Pension Scheme (EPS) and the government's pension scheme were a huge drain. The EPS is only 15 years old and services just 1.5 crore or so persons and has a gap of well over R50,000 crore already. The government liability on its guaranteed benefits pension—half of your last salary as pension for life—has also been going up by leaps and bounds. UTI’s US 64 also collapsed only because of the guaranteed returns it was offering. Which is why, instead of defined benefits (DB), Indian pensions started moving towards defined contributions (DC) where the money is invested by fund managers of your choice and the pension depends on the returns they generate.
If the government has been able to get just 51,000 persons for the NPS, it is not because the NPS offers lower returns than the EPFO. In most years, it is higher. And for NPS-lite, offered for the poor, the government also contributes R1,000 per year for five years, making the real returns here much higher than on EPFO. Given that the privately-run IIMPS’ pension scheme has managed to get 3 lakh subscribers already, and without the R5,000 government contribution, it's obvious the real driver is product delivery, not nominal returns.