Globally, politicians misuse pension funds

If we agree that social security funds are a good comparison with Indian PFs, then one cannot but pay attention to the US debate on this. The two most powerful regulators in the US Alan Greenspan, Chairman of the Federal Reserve and Arthur Levitt, Chairman of the Securities Exchange Commission (SEC) have both opposed it. Greenspan has bluntly stated that “I do not think it is politically feasible to insulate such huge funds from governmental direction”. We in India have a good example of what an unscrupulous brokers-banker-politician nexus can do by way of kickbacks and price rigging. The US debate raises other important issues. In the US, a $700 billion investment in the market would eventually give the government control over approximately four per cent of US stocks says anarticle posted on the MSNBC.com site. This is at least one per cent higher than the stock owned by Fidelity Investments and Barclays Global Investors, which are probably the two largest fund managers in the world.

In India too, PF funds, which are sought to be invested, would give the government far greater control over private sector companies. Companies which thrived under the license-permit raj probably look forward to manipulating such a situation to their advantage, but it is not always easy. It may be recalled that when the primary market was booming and the corporate sector less dependent on government banks and institutions, stalwarts such as the late Aditya Birla had called for “privatisation of the private sector” and demanded that institutions reduce their collective holding in the private sector to 25 per cent or less. The primary market cannot remain dead forever. Are industry association being very short term in seeking potentially more interference from government? While a higher governmentholding may be bad for companies it could be worse for investors. Those lobbying for PF investment in stocks, talk selectively about the 12.5 per cent returns by Chilean pension funds (as compared to 2.5 in India) but rarely do they quote global experience of government using pension funds to make politically motivated loans or support stock markets.

The MSNBC article says that “governments from Malaysia to Sweden have used or tried to use pension funds to support stock markets or make politicially motivated loans”. It says that these funds have been used to preserve local jobs, or make moral statements by dumping tobacco company stock or in one case, shares of Walt Disney (for depicting violence in movies). Robert Palacios, a World Bank economist is quoted as saying that “looking at experience around the world we haven’t found any examples of a well-insulated pension-fund investment-management system”. For instance Malaysian Prime Minister Mahathir Mohammad had proposed to use the national pensionsystem to buy stock and support the collapsing stock market in 1997.

The fund finally never came about, but lending on concessional terms from the pension fund corpus has already led to a big drop in dividend payments, drawing angry protests from trade unions. Hong Kong went ahead and used public money last year to keep off speculators, and the government is now stuck with huge holdings in local companies. Even with strong fiduciary laws in the US, state pension funds have often been involved in politically motivated lending or social investing. In India, fiduciary laws are virtually non-existent mainly because they are not enforceable by PF contributors.

The return on Indian PFs is meagre and large chunks of it already invested in hare-brained social schemes or public sector white elephants. But will it serve any purpose to give the government control over employee savings so that it has yet another handle with which to rig up the stock markets or support the megalomaniac ambitions of greedyindustrialists?

The author’s e-mail is: suchetadalal@yahoo.com