The Employees Provident Fund Organisation (EPFO) hit the stock market on Thursday, with an estimated amount of Rs 5,000 crore.
Globally, equities are preferred for investing pension money. An OECD survey in 2014 shows that large pension funds globally have about 30% exposure to equity. This depends on the depth of the market, in other words, how much money it has.
KK Jalan, Central Provident Fund commissioner (also CEO, EPFO) said, “Now [moving out of] a 22,000 crore by FII could shake the market,” adding that deepening the market would make it more attractive for pension funds.
Manish Jaiswal, senior director of CRISIL said that the very arrival of pension funds to the equity market would help the deepening. “[They] have the potential to deepen capital markets and add stability in the face of short term money flows,” he said.
The EPFO, according to Jalan has plans to offer investment options to the account holders: that is, to ask them how much they want to invest in equities, bonds and other instruments. But he said that it would depend much on the financial literacy of the investors, as only a good understanding of various financial instruments would enable them to effectively exercise this option.
Pension schemes in India, where only 8% of the working population is currently covered under social security, has been designed in Defined Benefit(DB) – where the employer, usually the government, offers you a predetermined amount in monthly instalments after your retirement– and Defined Contribution(DC) model – where employee and employer contributes to the future pension.
As DB model was not fiscally sustainable for the government, it started shifting to the DC model. One initiative was the New Pension Scheme, introduced in 2004, and opened to public in 2009.But the recent Atal Pension Yojna, aimed at the poorer unorganised sections of the population, is a combination of both the models.
Issue of regulation
Although Pension Fund Regulatory Agency (PFRDA) regulates the sector, there is dearth of data on the pension funds in the country, their corpus, and their investments.
“We need to study how many Pension Funds are there, and their total corpus,”said Jalan. Although one and half years ago EPFO reported to parliament that there were 3621 such funds in India, it later found that there were only about 1500, and could monitor online only about 23, he added.
“There are [funds] that are not investing not in accordance with the rules of the provident funds, finance ministry or EPFO,” he said. “..wrong things can happen..and has happened before,” he added.