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Less tension over pension

With issue-based Opposition now won over, the UPA must clear ideological obstacles.

india Updated: Dec 21, 2011 22:03 IST

The gridlock in Parliament appears to be broken over a piece of significant financial sector reform. The revised Pension Fund Regulatory and Development Bill has found backing from the BJP, which has managed to extract two concessions from the draft that was put up for parliamentary scrutiny less than a year ago. One, the new draft explicitly caps the foreign holdings in pension funds at 26%. Two, fund managers will now be required to offer at least one assured return scheme among their bouquet of products. Neither is a deal-breaker for shifting the country from a defined benefit pension model to a defined contribution one. Foreign capital is not a necessity for a modern pension industry in India and a fund invested in gilts can yield a pretty close approximation to an assured returns scheme. In a season of extremely partisan politics, the movement of the pensions Bill offers a glimmer of hope that policy is not completely held hostage.

The Employees Provident Fund Scheme, the State-owned defined contribution plan in vogue now, does not address the steadily mounting pension burden on future generations. By 2020, the average Indian will be 29 years old, with 30 years of work ahead of him — enough to pay for his father’s pension, but he will leave a load heavier than he inherited on his son with population growth slowing. Assured pensions work so long as more people are joining the labour pool than are leaving it. With the New Pension Scheme, every one of the 40 million contributors to provident funds now has the choice to save more, and the freedom to choose where these savings are invested. Pension fund managers cater to a broad range of risk appetite, from treasury bonds to equity markets. The returns can safely be expected to be higher than the 8.5% the Employees’ Provident Fund Organisation, which is required by law to invest its corpus in government debt, offers its customers.

The very design of the Employees Provident Fund Scheme — with employers coughing up a part of the contribution — limits its reach. Only one in 10 Indian workers pays into a provident fund. Pension reforms have for long been identified as a necessary condition for deepening our financial savings and a voluntary programme like the New Pension Scheme could dip into a rich vein of household savings that are invested in unproductive physical assets like land and gold. Moreover, a voluntary pension scheme can be enlarged into a wider social security net to cover medical and unemployment benefits. The industry needs room to grow under proper oversight, and that calls for legislative sanction for the pension fund regulator from Parliament. The government has managed to get some of the issue-based Opposition on board. It now must work on allies like the Trinamool Congress, whose reservations to the Bill are more ideological.