NEW DELHI, Jan 6: The S A Dave committee has favoured investment of pension funds in equity for maximisation of returns, creation of private fund management company and setting up of a pension regulatory authority.Justifying the need for investing a portion of pension fund in equity, the committee chairman S A Dave, while talking to newsmen here on Wednesday, said that the world over the long term return on equity was always found to be good despite volatility in the short run.He added that, "we should not be governed by short run volatility in the capital market as pensions are long term funds," and added this would also help in reviving the capital markets.Dave said that since the pension funds could only give a limited return for the pensioners, one of the ways by which the returns could be increased was to at least invest a part of the funds in the reputed stocks.He argued that, "what we are not asking for investments of the entire pension funds in the equity market, but for allocating aportion of the resources in the stock market" so as to improve returns on pension funds.He further said that investment should be permitted only in those equities where, "market capitalisation is high, liquidity is high and the impact cost of transactions is low". To begin with, investment might be confined to 50 shares of Nifty or 100 shares of BSE national index. This number may be gradually increased.According to Dave, at an appropriate time, investment in overseas equity might be allowed for better yield and management of risk. Under this environment, exempt establishments should also be required to engage professional fund managers, registered or accredited by the SEBI, for better management and returns on their exempt funds. This system of funds management by external professionals would also overcome problems of misuse of funds by exempt establishments.There was no justification for taxing yield of more than 12 per cent. In case of funds managed under the 1925 Act, there are no suchrestrictions and institutions like the RBI, IDBI and UTI declare higher returns without any tax obligation on their members. There was a need for unity and harmonization of this practice. This would also encourage better fund management practices.Presently, pensions are taxed in the hands of receivers. On the other hand, contributions to and interest earned on provident funds are fully exempted from tax. This is a disincentive for contributory pensions and needs to be rectified. There was also a strong justification to tax receipts of accumulated provident funds, Dr Dave said. It is quite equitable and it may be recommended that lump-sum receipts, up to Rs 60,000, may be tax free. Receipts over Rs 60,000 however should be taxed. An exemption may be permitted if such returns are reinvested in an annuity product of LIC or any other approved product. This will also introduce a disincentive for premature withdrawals from life-long savings for old age income security.The return on provident funds during thenineties has been 12 per cent. This can be stepped up through liberalisation of investment guidelines in a prudent manner. "When this is stepped up, the interest earnings may be taxed at the rate of five per cent and this amount be transferred to a national senior citizens fund for the purpose of redistribution activities in favour of today's old who are below or near poverty line.This should apply to all contributory or voluntary provident funds. An amount between Rs 600 to Rs 700 crore could be collected annually through this method, he added. The committee also wants that the coverage of employees provident fund organisation be extended to all establishments employing more than ten workers.
