New pension funds

A report on creating pension management services is slated to be finalisedthis week. Since India is now shifting to private-led accumulati...

A report on creating pension management services is slated to be finalisedthis week. Since India is now shifting to private-led accumulation andgrowth, expectedly the report of the S A Dave committee will be ondeveloping private sector fund management services. It also follows that thefund managers will be required to invest a portion of the pension funds inequity. The committee8217;s intention is to increase the return on pension fundinvestment: even a one per cent improvement will translate into an increaseof 30 to 35 per cent in the final amount received by the saver.

Reportedly, the committee proposes to confine the initial number of playersto six, to be selected through bidding; all to be registered as mutual fundswith Sebi. Each will offer three portfolio risk options,even the least riskyof which will have to invest in equities. Their performance will be keptunder watch: shortcomings will lead to the transfer of the portfolio of animpugned fund to the best performing fund, and fresh bids invited.

Financial assets of the household sector as a proportion of GDP at currentmarket prices rose from 11.4 per cent in 1997-98 to 11.8 per cent in1998-99. Investment in provident funds and pensions rose from 2.1 per centto 2.2 per cent; in non-banking deposits from 0.5 per cent to 0.9 per cent;and in shares and debentures from 0.2 per cent to 0.3 per cent. Providentand pension funds are safe because these are primarily into governmentsecurities. To improve the return on these, investment in equities must bethe preferred option.

But look at the risk perception of households: more savings go intonon-banking deposits than into shares and debentures. The new pension fundmanagers will have to develop a portfolio that is low in risk virtuallyrisk-free to attract financial savings and achieve a high return to stayin business in terms of the Dave committee8217;s intentions. Note that the kindof risk-reward mix that pension fund managers offer will have to pass musterwith the proposed Pension Regulatory Authority PRA. Is the PRA expected tofall in line with the committee8217;s approach to the risk-reward issue?.

It would have been a different matter if the committee had projected ahigher return based on the expected efficiency of private fund managers. Letthe market judge the performance of private pension fund services. Savingsare moving in a big way into mutual funds, reflecting the confidence ofsavers: this is the best asset to build upon.