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Sunday, 20 November 2011 07:57
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Not yet pension-ready

Pension bill a good start, but EPFO/PPF need sorting


The government has done well to steer clear of the suggestions made by the parliamentary standing committee while clearing the Pension Bill which, hopefully, will get passed in the next session of Parliament. Indicating a FDI limit in the Bill, which is what the Yashwant Sinha-chaired parliamentary committee wanted, would have meant the government would have to go back to Parliament each time it wanted to hike it. Similarly, implicitly guaranteed returns which Sinha wanted are what caused US-64 to go bust and what will cause the Employees Pension Scheme to go bust—based on a small sample which may not be representative, the 2010 shortfall in the EPS was reckoned at R50,000 crore. So the last thing new pension firms need is to be forced to give assured returns. As far as the fear that pensioners’ money wouldn’t be safe, the interim pension regulator has various schemes which pension funds have to offer—some force pension funds to invest in only G-Secs and equivalent securities.

Once the Bill is passed, this will pave the way for more pension funds to come in, to seek foreign partners and grow the business—theoretically, even the current interim regulator can do this, but a business that’s growing needs a firm standing. Difficult to say how big the business will be, but an all-India survey by the Invest India Economic Foundation—whose promoters are partners in India’s most successful micro-pension fund—a few years ago found that 80 million people were ready to invest in New Pension Scheme-type products and their investments could yield an AUM of over R12 lakh crore for pension firms over a decade.

But before pension firms come in and their products take off, the government needs to fix two big hurdles. Even if pension firms don’t need to give fixed returns, the fact that the EPFO/EPS and the PPF offer high implicit government-guaranteed returns means they have to give similar assurances, the surest path to disaster. Two, all regulators need to get together to resolve the issue of agent commissions—currently, there is no incentive to sell NPS-type pensions but there is a huge incentive to sell insurance. Third, there is the issue of regulatory turf which needs to be settled. The pension regulator regulates all pension firms but has no locus standi when it comes to pension schemes offered by insurance firms—that’s asking for trouble.



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