Pensions: World waiting to be explored

The average age of an Indian would be only 29 years in 2020,according to a report by Association of Chambers of Commerce and Industry. Its working population (age 15-59) which was 69.3 crore in 2007 is expected to reach 75.9 crore by 2012. Only 13 per cent of work force,mainly employees of government and organised private sector,is covered by the pension scheme. This clearly shows that there’s enough potential for new products in the growing pension sector.

Finance Minister Pranab Mukherjee has spoken in the recent past about channelising domestic savings into the equity products by insurance and mutual fund companies.

Securities and Exchange Board of India (SEBI) chairman UK Sinha also spoke earlier this year over the need for mutual funds to introduce pension products. However,the missing link in these suggestions is the lack of proper eco-system under which the industry could launch pension products. There is a need for some change in the current regulations to create an environment favourable for pension products. Be it the US,countries in Europe,Singapore or Japan,mutual funds have been the primary pension vehicle which developed the pension market in their respective countries and experts believe there is no reason why it can’t be replicated in India.

Limited options in mutual funds

Of the two MF pension schemes available in the market,one is from the UTI AMC (Retirement Benefit Pension Fund) launched in 1994 and the other from Franklin Templeton (Templeton India Pension Fund) launched in 1997. There is a tax benefit under both the schemes and they have a lock-in period of three years. UTI Retirement Benefit Pension Fund has given an annualised return of 10.59 per cent since inception while Templeton India Pension Fund has given a return of 12.73 per cent. Considering that the fund managers have mandate to invest only up to 40 per cent in both the schemes,the returns are good. However,the bad news is that there’re only two such funds in the market and in the last 15 years none of the MFs have launched any pension scheme.

“Tax break was not automatically coming and the MF industry was not confident how to go about it as it’s a long-term investment meant for retirement savings. Also there is no clarity on how it will be regulated,whether by SEBI or by PFRDA,” said Debashish Mallick,MD and CEO,IDBI Asset Management when asked why mutual funds did not launch any other pension products.

“Focus has been too much on products and not solutions,both on the part of investors as well as the mutual fund and insurance companies,which is why pension products are not very popular,” explains Sanjay Sinha,Founder-CEO,Citrus Advisors and a veteran in the mutual fund industry.

Huge pension market

Pension money is long-term money which means it can be channelised towards the infrastructure of the country. “Pension funds can contribute immensely for the development of infrastructure as government plans to spend R 50 lakh crore between 2012-17,” NR Rayalu,managing trustee and CEO of New Pension System (NPS) Trust said.

UK Sinha had earlier this year said that MFs should launch pension products in order to bring retirement money into the capital market. “Retirement money is not coming into the market. It is legally possible that retirement money can be invested in the markets…why are AMCs not able to launch pension funds?” he had questioned the MF industry.

While the capital market regulator may want to see fund houses launch pension products,there is a reason for lack of interest from the industry. According to Dhirendra Kumar,managing director,Value Research,unless such products are not made eligible for tax deduction benefits and strong deterrent clause not introduced (so that people do not exit before a certain age),it will be difficult for the industry to launch them. Another issue is of liquidity. SEBI regulations stipulate that MFs must provide liquidity to the investors. With a long lock-in period for the investors,like in NPS,MFs would end up breaching the norm for being a liquid investment. This calls for making exemptions in the current liquidity provisions for MFs which will allow them to launch pension products. Industry experts believe that with government pushing for popularising NPS,it is unlikely that tax sops will be provided in the near future to the MF pension products. Reason: through their strong distribution networks,mutual funds may eat up the potential market share of NPS.

However,more options for the investors would motivate them to divert part of their savings towards pension funds. Several MFs have proven over the years that they can generate good returns over the longer period. While the government has been talking about bringing domestic savings into the equity market,creating an environment for the industry to launch such products may give a major push to creating more options for the investors as well as reaping the benefit of experience of fund managers in generating good returns.

—ritukant.ojha@expressindia.com

Big market,but where are the options

* Unless such products are not made eligible for tax deduction benefits and strong deterrent clause not introduced (so that people do not exit before a certain age),it will be difficult for the mutual fund industry to launch such products

* There is no clarity how it will be regulated,whether by SEBI or by PFRDA

* MFs have been the primary pension vehicle which developed the pension market in most of the countries and there is no reason why it cannot be replicated in India