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Thursday, November 17, 2011

Government gives nod for 26% FDI in pension funds

The government is finally going ahead with the 26% foreign direct investment in pension funds and setting up of a regulator for them. The decision — too hot to be handled in the past because of the fierce resistance from the Left — was taken by the cabinet on Wednesday.

From now on, non-government salaried people will have the choice of saving for old age in pure pension funds, instead of going in for insurance policies decked up as pension schemes.

The FDI cap, however, has been kept out of the Pension Fund Regulatory and Development Authority (PFRDA) Bill — which has been amended to bring in the regulator — as the cap may be changed in future.

A government spokesperson said, “The government is of the view that the 26% FDI cap is at par with the insurance sector. But it would like to retain the flexibility of changing the cap as and when required.”

The legislation will allow the funds to invest part of their kitties in stock markets for high returns although at perceivable risks —  exactly the point Left leaders were opposed to.

Subscribers, however, will have the option of choosing from a range of schemes that offer various ranges of returns based on the risk profiles.

For instance, schemes investing only in government securities can offer as low a return as 2% a year while, going by the trends during the past three years, a corporate bond plan could fetch as high as 25%.

The proposed legislation, however, does not specify an assured return option despite the parliamentary standing committee on finance, led by BJP leader Yashwant Sinha, had made a strong pitch for it.

Currently, the pension sector has its own regulator, PFRDA, but it does not have statutory powers. The UPA government, in its first term (2004-09), introduced the PFRDA Bill in July 2005, but it lapsed after the House dissolved in 2009.

The interim arrangement is functioning since 2003 through an executive order. But it cannot impose penalties. The PFRDA's new pension system (NPS) was introduced and made mandatory for all government recruits, except the armed forces, from January 1, 2004. It was opened to all citizens from May 1, 2009 on voluntary basis.

As many as 27 state governments have notified and joined the NPS. As of now, the subscriber base in the government sector stands at 1.1 million with the corpus approaching Rs 7,000 crore.

Courtesy - Hindustan Times

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